The urgency to revitalize downtown San Francisco, which recently hit a record-high office vacancy rate, is front and center in the mayoral race.
While the candidates take potshots at each other’s ideas, they all agree that reshaping downtown means more people living, playing, and shopping there, which will also require building homes or converting them from empty offices.
But none of the candidates are saying the quiet part out loud: without major subsidies, likely at a level only the federal government can provide, those conversions won’t happen at high volume for at least two big reasons.
First, the math still makes more sense for owners of commercial properties to sit and wait, even years, for offices to refill with workers. “Conversion of properties is an expensive prospect unless it’s subsidized,” Markus Shayeb, senior VP of TRI Commercial Real Estate, tells The Frisc.
Second, City Hall makes more money taxing commercial property than homes. “On a per-square-foot basis, office [space] does more for the local economy than housing,” says SF’s chief economist Ted Egan.
Changing the downtown mix is a good idea for many reasons, not least of which is the civic fabric. A real neighborhood, not just a 9-to-5 beehive, will benefit the area’s small businesses, street safety, and public transit planning, for example.
Making outdoor space more inviting is a good start, and the city now has night markets, street parties, and entertainment zones on the calendar. transforming buildings is orders of magnitude beyond event planning.
Downtown on the ballot
Running for re-election, Mayor London Breed has floated several proposals for “more housing, students, [and] nightlife,” says campaign spokesperson Joe Arellano. Some are taking hold. Some have been shot down. Some are still under consideration.
She also teamed up last year with Board of Supervisors President Aaron Peskin, now a campaign rival, on legislation to ease the conversion of empty spaces into new housing, especially around Union Square. Peskin called the new law a chance to “reimagine and reinvigorate our downtown.”
Former supervisor and interim mayor Mark Farrell’s main revitalization idea is a mix of new housing and commercial space and a new park centered on Embarcadero Plaza and its funky designer fountain.
Another candidate, Sup. Ahsha Safaí, said via email that 9-to-5 commuting “is no longer as valid as it used to be” and that downtown must “evolve” to new uses. His ideas include more tax breaks for building conversions and a fund to buy buildings and attract a university.
Candidate Daniel Lurie, a nonprofit executive, says via email that relying solely on a traditional office resurgence “is not enough to revitalize our downtown.” If elected, he says he’ll emphasize public safety and cleanup. His major business goal is to make SF “a global leader in climate tech.”
(Farrell and Peskin’s campaigns did not respond to requests for comment.)
Breed also pushed successfully for Prop C, which voters passed this March. The measure gives tax breaks to property owners who pursue office-to-housing conversions. That said, many key players in San Francisco – including agencies that report to Breed – are assuming that downtown’s future will still lean heavily on traditional workplaces.
Waiting costs less
According to commercial real estate firm CBRE, SF hit a record-high 36 percent office vacancy citywide in the second quarter of 2024. Yerba Buena (57 percent), West SoMa (49 petrcent), and China Basin (41 percent) were the hardest hit.
The firm expects vacancy to peak soon, but a notable drop isn’t likely to follow. Renewals and relocations of existing tenants will make up most lease activity, CBRE analysts noted.
Even with Prop C incentives, it’s still too expensive to turn most offices into homes – as much as $1,000 per square foot in construction costs, estimates TRI’s Shayeb. (City economist Egan had warned before the election that Prop C’s benefits were “too small to close the feasibility gap.”)
For comparison, analysts deemed SF’s average construction of $440 per square foot in 2022 the highest in the world, and noted many projects couldn’t afford to break ground at that level.
A 2023 report from the Urban Land Institute and SPUR concluded that in most cases it doesn’t make sense to convert office buildings to housing or other new uses, projecting that “such projects are not financially feasible, because they generate less value than maintaining office use.”
It’s not just the private sector saying it. The message is coming from Breed’s housing department too. “Without a combination of additional funding and property tax exemption, these projects won’t pencil,” says Anne Stanley, spokesperson for the Mayor’s Office of Housing and Community Development.
For office building owners, waiting costs less. “If you own the building outright, the wait-and-see game is affordable as long as you have 20 to 25 percent occupancy,” says Shayeb. (And as long as you’re not saddled with crushing debt, which has led to some high-profile defaults in the city.)
Even lightly occupied buildings can generate cash flow, because commercial rents remain surprisingly high. Egan, citing JLL data, says SF’s 2023 average was about $73 per square foot. That’s down 22 percent from the 2019 peak, but still well above other cities, including Miami ($50), Boston ($47), and Austin ($42). The national average is $31 per square foot.
When SF’s dotcom bubble burst around 2001, office rents depreciated some 70 percent. Comparatively, the pandemic bust for office rents is like when an old-money family falls on hard times.
For those holding the deeds, you might call it the Lucille Bluth bust.
29 conversions, 38 years
The idea of converting downtown offices to much-needed housing has captured a lot of attention. A couple years ago, architecture firm Gensler surveyed dozens of buildings for candidates and came up with 12.
Yes, sometimes old buildings turn into homes or just get knocked down and replaced with them. The city even has a list: it’s happened 29 times over 38 years.
The Planning Department is keeping track because of office-space rules both old and new. In 1986, voters approved Prop M, a cap on new offices as part of the city’s late-20th-century war against “Manhattanization.” But this year’s Prop C said that offices converted to homes can be counted under that cap.
It seems like an odd exercise. Why would anyone want to build more workspace these days? Derek Daniels, regional research director for the investment firm Colliers, says the commercial market has bottomed out but “long term, there is confidence … as we saw with the Transbay building boom, it’ll take off again.”
SF Planning chief of staff Dan Sider echoes that sentiment: “Maybe not right now, but we’re planning for the future.”
The city is also thinking about future budgets. In the 2022-23 budget, commercial and residential property taxes made up 58 percent of city revenue. Pricey homes generate tax value, but not like commercial buildings — even as tax levels drop from appeals or from lower sales. The Transamerica Pyramid, for example, was being taxed at $5.7 million per year when its new owners appealed that valuation in 2022. (They argued the $650 million price tag, which they paid in 2020, no longer applied.)
The office market also feeds other taxes on business operations, executive pay, commercial rent, and the transfer tax on sales of properties worth more than $25 million.
The pull is strong. Salesforce, SF’s largest private employer, told employees in 2021 that the 9-to-5 workday was dead. But a leaked memo this summer showed an about-face, ordering most to come back by October.
One Salesforce employee who asked to remain anonymous tells The Frisc he was hired for what was supposed to be a permanently remote position, and he moved his family out of San Francisco. He’s now expected back soon.
He doesn’t think he’ll be fired for refusing, but his supervisors may hold it against him: “The last couple of months, they’ve told us point blank: this will affect your role.”
Some folks, especially tech workers, have come to expect a work-from-home perk. They’ll continue to have some say, but for how long? That WFH-RTO tug of war could play the largest role in San Francisco’s downtown recovery, no matter how much city officials give alternatives the old college try.
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