“Will this work for residential?” is the question Grosvenor Properties is asking about the office-to-apartment conversions in its San Francisco portfolio, according to Senior Investment Manager Nathan Lundell.
“This work is just beginning, which means you won’t see the impact of the changes for five to 10 years,” he added.
Office remodeling has become a hot topic across the country, but especially in San Francisco, where a third of offices are vacant and worker office attendance is less than half of pre-pandemic levels. But actual conversions, spurred by high vacancy rates and recent moves toward lower zoning codes and fees, will likely be years away, analysts say, requiring a concerted effort by government and developers to get the projects on track.
“What I like is that everyone is doing the right job,” Lundell said. “The owners do the analysis and ask the questions. The city government actually has the right idea and tries to think: ‘How do we get out of the way? How can we allow this organic change to begin in the first place?’ That is promising.”
According to several recent studies, the city has a higher number of convertible commercial buildings than other markets due to its abundance of older, smaller office buildings. There are nearly 800 office buildings in San Francisco that could be good candidates for repurposing, according to a new study by brokerage firm Avison Young. This ranks the city fifth highest among 14 major cities in the United States and Canada.
The two most important factors in the analysis are the age of the building, with buildings built before 1990 being the better candidates, and the size of the floor slabs. Under 15,000 square feet is best because there is a smaller span between the core and the windows, they said Sheila Botting, president of professional services North America at Avison Young, “if you don’t want to live in a bowling alley with the window rolled down at one end.”
A report by public nonprofit SPUR, architectural firm Gensler, and consulting firm HR&A earlier this year found that 40 percent of downtown San Francisco’s buildings would be good candidates for repurposing, compared to 20 percent of all buildings across North America. The analysis was based on a combination of factors including the building’s shape, size and ceiling height, elevator availability, location and proximity to public transport.
The report also noted that city planning code requirements, including those related to open spaces, number of bedrooms in each unit and seismic improvements, make it “unlikely for most developers to undertake a complex remodeling project under these circumstances.” In addition with high construction costs and stagnant rents in today’s market, “a residential conversion would generate less value for the property owner than retaining the office use, even with high office vacancy rates.”
Given all of the current economic, regulatory and practical obstacles, Nick Slonek, Avison Young’s regional managing director, estimates that of San Francisco’s 800 buildings that could be converted to housing, less than 10 percent are viable. Although environmentally conscious developers and the city would like to see the buildings reused, the price of repositioning may be higher than tearing them down and starting over, he said.
“Obviously, despite sustainability wishes and tax credits and things like that, demolishing the building and rebuilding it is very expensive, but in some cases it’s more cost-effective than remodeling,” he said.
The SPUR report puts the construction cost, including labor and materials, of San Francisco remodeling projects at $472,000 to $633,000 per unit, excluding seismic upgrades. Soft costs, which include city charges, range from around 20 to 40 per cent of total project development costs, which is one reason Mayor London Breed has pushed so hard to reduce them.
She supported the recommendations of a city panel reduced need for affordable housing and lower development feesand joined forces with Chief Executive Officer Aaron Peskin Introduce laws designed to facilitate these conversions, including doing away with the open space and bedroom requirements. Those legislative efforts are due to be presented to the board of directors later this year and, if passed, could accelerate the development process by 18 months, according to planning director Rich Hillis.
Breed has also pioneered the idea of converting traditional office buildings into life science labs. This idea seems great in theory The life science market was the only bright spot Analysts expect this to increase in the office market this year but may end up costing prohibitively unless the price of buying an office building falls close to the value of the property itself.
According to Slonek, the move to life sciences is a “real dilemma” as ceiling heights in traditional buildings would need to be raised by several meters and huge investments would have to go into overhauling the ventilation systems.
Additionally, as the building increases in height, the amounts of hazardous materials permitted in a building decrease, according to Gregg Domanico, vice chair of CBRE’s Bay Area life sciences practice. That makes high-rise buildings particularly difficult for the life sciences transition.
But if the price of buying buildings comes down enough and the city offers broad economic incentives to make those conversions viable, Domanico via email believes the demand is there.
A number of life sciences tenants would rather live in “converted products” in the city than new homes on the Peninsula or East Bay because of the “close proximity to the San Francisco workforce and the urban amenities that San Francisco zoning offers.” historically prevented.”
With a push to change this zoning and other incentives from the Mayor and possibly the stateCoupled with a possible further decline in office building values as more loans mature, conversions across the board could be a real game changer, analysts say.
“The sand is moving all around us right now, so it’s really important as we think about the next five years that more buildings could become more viable than we would see today,” he said Botting with Avison Young. “It’s not necessarily an exact science. This is about contemplating the art of the possible. How can we solve some of the big problems facing inner cities across North America? And conversions will be one of the many tools you can use for this solution.”
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