A New York developer is pushing forward on plans to build two high-rise apartment towers in San Francisco’s South of Market neighborhood in what could result in a major burst of activity for the city’s otherwise stagnant construction pipeline.

Tishman Speyer submitted an update for its project at 655 Fourth St. that would include two high-rise residential towers that would collectively result in more than 1,100 housing units, according to San Francisco Planning Department filings. The revised proposal no longer includes the hotel and office components included in earlier versions of the proposal, which the developer began pursuing nearly a decade ago.

The latest version, if approved, would result in two towers that would each surpass more than 400 feet. One would span 38 levels, while the other would top out at 40 levels, and combined would include a mix of studio, one, two and three-bedroom units. The project would require the demolition of the three existing buildings and seven surface parking lots to make room on the site, which is right across the street from Caltrain and Central Subway stations.

Nearly 10,000 square feet of street-level retail and amenity space would also be included in the revised project.

The new plans mark a significant shift in Tishman Speyer’s outlook for San Francisco’s commercial real estate market, which prior to the pandemic was fueled by the nation’s priciest office rates and a bustling tourism economy.

In the years since Tishman Speyer began to pursue the project, however, the pandemic and subsequent economic shifts have resulted in a record amount of vacant office space, plummeting valuations and a battered hospitality market, all of which have all but drained the city’s development pipeline. The developer said in its revised application that the changes are a direct result of the pandemic and attempt to ensure the project’s feasibility as the firm tries to navigate the current uncertainty.

“These changes will create a more viable project,” a Tishman Speyer spokesperson said in a statement, adding that the New York developer “is committed to moving the project forward at the point and time that make sense.”

Tishman Speyer acquired the SoMa site for $40 million in June 2019. The Fourth Street project is estimated to cost upwards of $500 million to construct, according to planning documents.

While the city struggles with an office vacancy rate that has skyrocketed past 30%, multifamily demand has been far more steady. Still one of the priciest markets in the nation, a typical unit in the city commands more than $3,000 per month, according to CoStar data, roughly double the national average.

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By Erik Sherman

August 09, 2023 at 08:46 AM

Researchers created a model to identify parameters that would indicate a financially viable conversion.

With rapidly falling office property valuations that, according to one study, could lead to $800 billion in lost value by 2030, concern about what to do in the sector is understandable.

One of the potential strategies is to convert office buildings to housing. There have been questions about how effective this could be, given issues of building layout and the number of adjustments necessary to enable habitability.

A new National Bureau of Economic Research working paper (meaning not yet peer reviewed) from researchers at New York University and Columbia Business School, with support from the Brookings Institution, suggests “a set of criteria to identify commercial office properties that are physically suitable for conversion, yielding about 11% of all office buildings across the U.S.” The conversion specifically was to “green apartments.”

The paper’s authors were Arpit Gupta, an associate professor of finance at New York University; Candy Martinez, a doctoral student in finance at Columbia Business School; and Stijn Van Nieuwerburgh, a professor of real estate at Columbia Business School.

The researchers noted the “triple forces of rising interest rates, the emergence of remote work, and environmental taxes” and estimated that a building with a pre-pandemic valuation of $100 million would likely have a present value of $38.9 million, a drop of 61% loss of value.

The paper shows a “pro-forma real estate model that identifies parameters under which these conversions are financially viable” as well as “several policy levers available to federal, state, and local governments that could accelerate the conversion, and that may be necessary should policymakers desire the creation of affordable housing.”

The researchers found potential candidates through a six-step process:

1. Focus on locations in a city where the negative pressures on office are strongest but where there are “strong transportation amenities.”
2. Consider only buildings constructed before 1990 because often “historic buildings tend to be cheaper, have smaller floor plates, and are more charming, all of which increases their conversion appeal.”
3. The model works with A-, B, and C buildings that are underused as many tenant companies have employed a flight-to-quality approach toward leased real estate.
4. Require buildings to have at least 25,000 square feet in size to ensure enough economies of scale for conversion.
5. Eliminate buildings with a distance from windows to core of more than 60 feet to enable enough light and air circulation as well as room for enough plumbing.
6. Eliminate buildings with no or few long-term leases left.

The top five metro areas with the highest number of potential conversions were New York-Northern New Jersey-Long Island (634 buildings, 68.4 million gross square feet); San Francisco-Oakland-Fremont (358, 21.2 million); Los Angeles-Long Beach-Santa Ana (254, 16.2 million); Washington-Arlington-Alexandria (155, 11.6 million); and Chicago-Naperville-Joliet (113, 14.0 million).

The researchers then showed a pro-forma for a 212,500 square foot office building that went from $4.12 per square foot rent pre-pandemic to $3.50 post-pandemic. After conversion, with a usable 175,000 square feet, and hard and soft costs of $80 million, plus $10 million in green improvements, given 30 months to design and 18 months to lease up, market rate apartments would command $8 per square foot for a 2033 NOI of $11.5 million (up from $3 million post-pandemic), a net present value in 2022 of $4.1 million, and a 2022 IRR of 16.8%. For affordable apartments, the costs are the same, rent would be $6.84 per square foot, 2033 NOI of $9.2 million, 2022 NPV of -$8.6 million, and a 2022 IRR of 12.1%.

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The idea of ​​remodeling office buildings as apartment buildings is attracting the attention of a wide range of stakeholders. In markets like Dallas, Los Angeles, Washington, DC and New York City, the confluence of high demand for residential and struggling office real estate has led to conversion projects. Old office buildings from the first half of the 20th century and later can offer listed architecture.

But the enthusiasm that emerged late in the pandemic was to be tempered by the complex realities of design, construction and financing.

“Things calmed down a bit when people realized that conversion is very complex and it takes a thorough analysis to really assess whether an office building is convertable,” said Mack Selberg, managing director of the architecture firm Ankrom Moisan. “Conversions really need to be thought of as the opposite of a template – you have to know everything about the building before you can predict how the conversion will go.”

layouts and viability

From a financial perspective, office conversions can be contradictory; Properties to be remodeled typically need to be in locations where rents are high enough to justify the cost of the renovation. This often raises the question of whether state or local governments offer attractive incentives for the implementation of projects.

A differentiator is the conversion to rental versus private ownership. “Many conversions don’t work when the owner intends to sell the units as condos due to lending practices,” noted Paula DeLiso, vice president of business development at MBH Architects. “Office buildings that are repositioned for tenants can be much easier to finance for the building owner.”

Technical issues are often a major reason for hitting the pause button. The conversion of office buildings into residential buildings presents opportunities and infrastructure challenges that come with a higher price. The layout must be suitable for residential use, and the infrastructure of the building may not be suitable. Floor plan overhauls and structural changes will drive up costs, as will remodeling HVAC, plumbing, and electrical systems.

Conversion targets are only as attractive as their layouts, which must be compatible enough to make the structure transformation possible.

“Often times when I look at office buildings, their shape just doesn’t allow for repurposing or adaptive reuse simply because of the way they are designed or built,” said Ryan Kimura, senior vice president of strategic partnerships at a Dallas-based company design services company premierwho found that hotels are often attractive targets for conversions due to their linear design.

In search of the light

When office buildings are reviewed for potential repurposing, a configuration that provides access to light and air is a top priority. “The biggest problem is that the building is too deep to provide enough natural light,” said Tim Haley, technical director and senior associate at Alameda, California MBH Architects. “For an office remodel to work well, you should choose a narrower tower or one with an ‘L’ or ‘O’ shaped baseplate to maximize light for each unit.”

One solution is to add a light well in the middle of the building. But that doesn’t fit in earthquake-prone regions like the San Francisco Bay Area. Installing a light well would eliminate much of the floor space, which acts as a structural membrane to resist earthquake and wind loads, Haley noted. Older Class B and Class C buildings on the Pacific Coast will likely require seismic upgrades as part of the remodeling process, a factor that increases rehabilitation costs.

behind the walls

Costs are driven not only by structural changes, but also by remodeling heating, cooling, ventilation, plumbing, and electrical systems for residential use. What goes on behind the walls and under the floorboards is key to remodeling a property. Age and durability of wiring systems is an important consideration, as are natural gas distribution systems.

What goes on behind the walls and under the floorboards is key to remodeling a property. Age and durability of wiring systems is an important consideration, as are natural gas distribution systems.

“Due to the more stringent requirements, you probably won’t be able to reuse gas systems in buildings,” said Dan Colombini, director of New York City-based engineering firm Goldman Copeland. Residential buildings require large, centralized hot water heating systems, and new residential buildings should incorporate energy-efficient heat pump technology.

In an office building, the sanitary installation is often less distributed than in an apartment building with numerous kitchens and bathrooms. “The lines go through these buildings like raindrops,” Selberg said. Some older plumbing systems are being replaced wholesale. Making a property compliant with residential security regulations is a challenge, as is ensuring universal wireless internet access. “Sometimes older office buildings have a lot of concrete structure,” Kimura said. “And signals don’t necessarily go through concrete very well.”

Art Deco landmark

Two high-profile Manhattan projects, both with Art Deco landmarks, illustrate the possibilities and challenges of remodeling. Macklowe Properties recently unveiled One Wall Street, the 50-story limestone Art Deco tower that stands on Broadway and Wall Street adjacent to the New York Stock Exchange earlier this year. The building was designed by Ralph Walker for the Irving Trust Co. in 1931 and expanded in 1963. With more than 1 million square feet of total floor space, the project is the city’s largest office-to-residential conversion to date.

Resolution Real Estate is in the process of converting a portion of the 650,000-square-foot McGraw Hill Building in Midtown Manhattan from an office to a residential building for property owner Deco Tower Associates. The Art Deco skyscraper at 330 West 42nd Street was built in 1931 for a single tenant, McGraw-Hill Publishing Co. Designed by Raymond Hood and J. André Fouilhoux, it is a New York City Landmark and a National Historic Landmark and is listed on the National Register of Historic Places.

“It has enormous floor slabs and a very high ceiling,” said Gerard Nocera, a managing partner at in New York, who was originally commissioned to refurbish the building as an office property. As COVID hit and the office market changed, “we realized that the top part of the building is perfect to meet today’s high demands for rental housing,” he said.

The building’s central location and thoroughfare, which tends to make it an attractive office property, made it a prime candidate for conversion. “We changed the core of the building, made it tighter,” Nocera said. The company brought in brand new electrics, air conditioning and windows, and destination delivery elevators for a new residential lobby.

Laws governing lobbies are one of many examples of New York regulations affecting residential buildings. Fire protection equipment must be separate in mixed-use buildings, and bedrooms, which must have windows, must not be on a property line.

“We were lucky, we’re an as-of-right project, not technically a conversion, so I don’t need to get[the Department of]Urban Planning approval,” Nocera said. This approval process would take approximately a year, although actions to streamline the process are pending.

The new lobby is a New York City requirement that mandates separate residential entrances and elevators for mixed-use buildings. Construction of the apartments is expected to start in June, rentals will begin in 2024.

Read the May 2023 issue of MHN.

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