Exploring Solutions to San Francisco's Office Vacancy and Housing Crisis

San Francisco is facing its highest office vacancy rate in nearly three decades. Commercial real estate firm CBRE said in a recent report that 27.1 million square feet of a total of 90 million square feet is currently vacant.

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"The pandemic has had a major impact on the office market in San Francisco," said Colin Yasukochi, CBRE's executive director at its Tech Insights Center. "Prior to the pandemic, our office vacancy rate was about 4%. Today, that number is more like 26%."

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As remote work becomes more popular, the problem of work-life balance is only expected to worsen. San Francisco has been referred to as the work-from-home capital of the United States, with the American Community Survey finding that 46% of employees in San Francisco worked from home in 2021, up from 7% in 2019. This trend is likely to continue, as more and more people find that they can do their jobs from anywhere.

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To address the rising number of office vacancies, one local legislator is pushing to convert empty office buildings into residential buildings. Matt Haney, a Democratic state Assembly member, says tackling the empty office problem could help the city take the much-needed steps it needs to address the housing crisis.
Haney stated that leaving the buildings empty would be detrimental to the downtown area and a waste. He suggested that utilizing the buildings could help with the housing crisis.

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The state of California is mandating that San Francisco build 82,000 new units of housing, including affordable units meant for low-income residents, by 2031. In order to meet that goal, the city needs to build 10,000 units of housing per year starting next year. However, San Francisco Mayor London Breed believes that task is easier said than done due to the lack of support from local legislators.

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Breed warned that unless the city makes some major changes, it will lose state support for affordable housing. She said that the city's legislative body is not likely to be open to such changes, but if they don't happen, the consequences will be severe. The latest CBRE report published in early December found that office vacancies in the third quarter reached a nearly 30-year high, with a vacancy rate of 25.5%. This rise in vacancy rates is having a major impact on the city’s economy.

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"We are facing a budget deficit of over $700 million, largely due to the challenges around our empty office spaces and the closure of businesses in the financial district," Breed said. According to CBRE data, there have been 42 office conversion completions in the U.S. so far in 2022. However, only 17% of those have been converted into multifamily homes, while 46% have been converted into office-to-lab space.

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According to Yasukochi, life sciences lab space can command much higher rents than office space, making conversion to this use financially viable. Although there is still high demand for residential space, it is not enough to cover the costs of development from a financial perspective.
In today's market, developers often lack the incentive to build housing, and strict housing policies can make it difficult to turn a profit. lengthy processes can make it difficult to turn a profit.

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However, in many cases developers are already at a point where they are investing in costly upgrades. Office conversion typically takes place in older, Class C buildings in need of major repair and remodeling and often in unfavorable locations. While an office-to-residential conversion may require the stripping of a building, in most cases it is still much cheaper than building from the ground up.

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"From a developer standpoint, the most important thing is what makes the most financial sense," said Marc Babsin, president of Emerald Fund, a real estate development company that completed one of the largest office-to-residential conversions in the city at 100 Van Ness Ave.
Babsin noted that there are several obstacles to converting office space to residential units, with the biggest being that the costs of construction are currently too high to make the numbers work. She suggested that the government could take steps to make the process easier.

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The mayor of San Francisco said that the problem is that it takes a long time to build housing, especially given all the requirements.
"We already have a lot of laws in place governing things like height limitations, open space requirements, and the number of units that can be built," Breed said. "But on top of that, we make people go through an insanely long and complicated approval process."

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San Francisco's housing crisis is unlikely to be solved anytime soon, according to Breed. The city needs to build more housing in any manner, she says.
"We need more housing," she said. "Affordable housing sounds good, but it's hard to get access to in this city. The system we've tried to repair under state and federal law is very difficult to work under. So we need to be as aggressive as we can to get more housing built."