Converting San Francisco’s old downtown office buildings into housing won’t be an easy task, with high costs, clunky floorplates and existing tenants in sparsely populated buildings only a few of the obstacles developers need to overcome.
Desolate buildings still need to be in places people want to live.
“Hope is not a strategy,” said Nick Romito, co-founder and CEO of VTS, a leasing and asset-management data company. “The hope that if you convert it, they will come, well, a lot depends on where that building is.”
While New York City’s downtown financial district is home to a number of successful office-to-residential conversions, it also takes a vibrant neighborhood, with bustling cafes, grocery stores and more.
“That is not the same for San Francisco,” Romito said. “The infrastructure and the cost of converting a building — that’s part of it,” he said. “But I’d be more concerned about, even if you can convert it, who wants to live there?”
In the game
Romito talks with the confidence of a New Yorker about the challenges San Francisco faces. He also has skin in the game, with offices downtown at the Embarcadero Center, one of the West Coast’s largest mixed-use properties.
A decade ago VTS got off the ground, offering a service Romito describes as the “Salesforce”
CRM,
” of the office-leasing industry. It was helped along by his Rolodex of top landlords. Romito previously was a broker in New York City’s notoriously feast-or-famine office sector, while in a previous role also oversaw a portfolio of millions of square feet of office space.
The turmoil in the office properties means many former clients now use his data to help make sense of the coming carnage, including as landlords face sharply higher borrowing costs since the Federal Reserve rapidly raised rates, a mountain of debt coming due and other tough choices.
See: The $1 trillion ‘wall of worry’ for commercial real estate that spirals through 2027
“What’s cheaper?” Romito said. “Is it cheaper to add amenities in maybe a zombie building, add a floor or two, to create a better experience? Or is it cheaper to knock the entire building down, rebuild something else, and pray to God you lease it?”
Cost of the land
San Francisco isn’t a big city by global standards, but its woes have become notorious, from its population drain, the fentanyl crisis to concerns about public safety. Breathing new life into old office buildings sounds like an enticing fix for a shelter problem that has been building to a crescendo, after decades of new housing initiatives being voted down.
Like other major California cities, the tide of homelessness increasingly includes people who are elderly. The fentanyl crisis ravaging the U.S. only matters on the ground worse.
As Mayor London Breed in June told Bloomberg in a sit-down interview, “The issues around opioids have done something to our city, and to other major cities, like something that I’ve never seen before.”
She now also wants action, not only the “doom and gloom everyone is talking about.” As part of the push, Breed called out the tech community to not only “make money from San Francisco,” but to stick around and invest in its solutions.
Warren Wachsberger, CEO of Aecom Capital, an investment arm of private-equity firm Aecom
ACM,
with a focus on construction, said revamping old office buildings isn’t that simple.
“Less than 1% of all apartment units underway, being built nationally, are office-to-residential conversions, despite everybody’s love affair with them,” Wachsberger said from Los Angeles.
“Many buildings probably won’t work,” Wachsberger said, adding that thick, concrete office floorplates often need to be drilled through, plumbing and heating systems overhauled, and local building codes all add to the headache.
“It’s a lot easier and cheaper to demolish it and start over from scratch,” he said. “That means buying buildings essentially at the cost of land.”
Wachsberger said hopes for expanding an earlier office-to-residential conversion effort in Los Angeles from the 2000s likely hinges on incentives for developers and the buildings being in places where people wanted to work, eat, live and shop. “Until that’s able to come back, it’s difficult to create the vibrancy that was there prepandemic,” he said.
AI and a new direction
San Francisco’s downtown core remains largely hollowed out, even as the city makes a noticeable push for cleaner and safer streets in the wake of the pandemic. The goal is to draw more office workers back to old commutes, enticing them to buy a morning coffee, a sandwich or drinks after-hours.
But its office-vacancy rate remains high at 27.1% as of the second quarter, according to Cushman & Wakefield CWK. The real-estate firm expects San Francisco vacancies to tick higher through the rest of this year, as some 4 million square feet of leases expire.
As part of its turnaround effort, the city has been getting tougher on open-air drug use in recent months. Longer-term, it plans to cut homelessness by half in the next five years, revamp downtown zoning and eventually convert unloved office buildings into other uses, including housing.
There also has been a lot of buzz this year around artificial intelligence technologies, which has been a major boon to big companies like Apple
AAPL,
Amazon
AMZN,
Alphabet
GOOG,
Microsoft
MSFT,
Meta
META,
Nvidia
NVDA,
and Tesla
TSLA,
while also sparking a broader stock-market rally.
See: VC spending is in a tailspin, and AI can’t reverse the trend — yet
Gabriella Sierra’s team of researchers at Cushman & Wakefield in San Francisco said in a second-quarter outlook that AI’s anticipated presence might partially revive the tech industry’s footprint in the city.
But AI also isn’t likely a cure-all for the city’s financial woes, particularly with San Francisco projecting its budget shortfall to climb to $1.3 billion by fiscal year 2027-2028.
Romito said that despite a “bit of a renaissance” in office-leasing demand in the past quarter by firms with an AI focus and venture capital funding, it isn’t likely “enough to carry a market.”
Stocks were mostly higher on Monday, with the S&P 500
SPX,
and Nasdaq Composite Index
COMP,
on pace for the strongest seven months to start a year in decades. The Dow Jones Industrial Average’s
DJIA,
rally has been more modest, up 7.1% on the year so far, according to FactSet.
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