Solving The SF Housing Crisis -- Vacant Office Conversion

In the ongoing effort to find solutions to San Francisco's housing shortage, there is a lot of focus on one historic office building right next to the Warfield Theater. City officials have approved a plan to convert several floors of 988 Market Street into 45 units of housing. It's the first post-pandemic project of its kind, and it could be a litmus test for these types of office-to-residential conversions. And of course, the city has plenty of vacant commercial buildings right now. According to the Bay Area Economic Institute, office vacancies —during the pandemic skyrocketed to around 30%, and the current vacancy rate now hovers at 35%. A recent Moody's study also found at least 13% of those vacant buildings could potentially be suitable to be converted into housing. For more on this, we're joined by Austin Klar, a realtor at Avenue 8 in San Francisco. Austin, good to see you. Thank you for the time today. Let's start with this project, the first such project approved here in the post-pandemic world. How important is this building at 988 Market Street going to be? And what are you looking at in terms of how this conversion plays out?

Thanks for having me. Happy to be here. It's, it's a really important project, mainly because it's, it's a test for conversions under a recent ordinance that was passed in San Francisco that is specifically designed to help alleviate the housing shortage by making it easier to convert a lot of these vacant office spaces into residential buildings.

Yeah, so talk more about that, 'cause these developers are being encouraged here to convert these buildings into residential office— into residential units, that is, because of this ordinance that was passed last summer, and it allows developers to bypass a lot of building requirements. They even get tax breaks and breaks on certain fees. Are we seeing that play out in this particular project? Did we see the developers at 988 Market more developers taking advantage of the new streamlined process in the city?

Yeah, so it's very new. So this is, you know, like you mentioned, the first of its kind in this post-pandemic era. You know, we'll see how many more developers start to take advantage. There have been some other, you know, a little bit smaller-scale projects that are moving through. You know, I just saw something this morning about a church that was going to be converted into, you know, residential space as well. Not something as large as this 45-unit complex, But every little bit helps, you know, with our housing shortage. I mean, the main driver to get developers to the table, like it or not, developers are in the business of making money, right? You know, nobody's working for free. And so the city needs to and already has, you know, do a lot to kind of streamline the processes that, you know, in the past, you know, people looking to do residential development have had to go through, which can be incredibly time-consuming. Incredibly unpredictable and incredibly expensive as a result. And, you know, that time is, is so much more important now than it's been in a long time just because of where interest rates are at. And so anything the city can do to streamline these processes and exempt a lot of these buildings from requirements that would ordinarily be in place to create a residential unit, things like egress rules and, and you know, the residential bedroom count, how many units have to be 2 bedrooms versus 3 bedrooms. Relaxing all standards can make it a lot easier to convert buildings that really were built with no intention of residential use into things that can be good usable housing.

Yeah, and so what are we looking at when we look at these vacant commercial buildings? What are the features that make a particular building potentially a good candidate to be converted into housing units?

Yeah. So when you think about these buildings, you know, residential buildings require, like I said, windows for egress, you know, out of your kitchen, you need to have access to the outdoors. Floor plans have to be changed to account for infrastructure, you know, sewer and plumbing and electrical and, you know, just power. Seismic is a big issue. So in particular, buildings that maybe need minimal seismic updating or no seismic updating, that's a huge driver of cost. So buildings that are a little bit more on the modern side with respect to that sort of infrastructure are really good candidates. And we're also seeing a lot of smaller buildings be good candidates because you're more likely to be able to get all the units in the building easy access to the outdoors, you know, through windows and access to elevators in the building. Whereas if you have, you know, a very large commercial floor, it's going to be really hard to get a lot of that interior space accessible. To the outdoors in a way that makes sense for a residential space.

Yeah, and obviously the big goal here is to try to get more housing units on the market and create a more affordable environment for people who are buying or renting here. Let's put up on the screen here the situation if you're trying to just rent a place in San Francisco. It's still, the prices are coming down, but it's still pretty expensive. The median rent in San Francisco is just over $3,200 per month, and it ranks 4th in the US in terms of the 4th highest rent here. When we talk about these conversion projects now just sort of getting started in San Francisco, the first project approved by city officials, what's, what's the tipping point? How long do you think it is going to be? How many of these conversions do we need to see from office to residential to really make a dent in the housing shortage?

No, it's a, it's a great question. And I think the, the office to residential piece is one piece of a much broader effort by the city to get more housing. There have been a number of different ordinances that have been passed recently that are designed to streamline all of the permitting processes for new development, not just specifically the office to residential conversion. So limiting the ability of neighbors or other potential stakeholders to object to certain projects even after these projects have been approved and limiting the number of actual steps you need to go through to get your zoning change from a commercial use to a residential use. All of these are tools that are being implemented by the city to encourage people to come to the table and help make these projects pencil. You know, a specific tipping point, hard to say. I mean, right now, even with the exodus that we've seen from San Francisco since the onset of the pandemic, rental vacancies are still at, you know, a little over 6%. So it's not as if, you know, there are tens of thousands of units that are just sitting idly waiting for people to to rent them. Even with that exodus, we still have a pretty extreme shortage of, of supply. And that's just on the rental side. There's a whole other side of it, which is the purchase side, which is, you know, a different— a similar issue in terms of, you know, affordability constraints caused by just limited, limited building.

Yeah, still a really long way to go, as you point out, until we get more units on the market and hopefully make things a little bit more affordable for folks in the city. We appreciate the insight and the time. Austin Klar, a realtor at Avenue 8. In San Francisco. Good to see you. Thank you.

Thank you.