- By Patrick Hoge | Examiner staff writer |
- Nov 26, 2024 Updated Nov 27, 2024 (SFExaminer.com)
Chris Fraley was 26 when he returned from vacation in 1995 to find a memo on his desk with two paragraphs of fresh New York state law authorizing an incentive program for spurring conversion of offices to homes in lower Manhattan, which in the early 1990s had widespread office vacancies.
Over the next two years, Fraley played a key role in setting up a program credited with facilitating the conversion of offices into nearly 13,000 homes — and he said he believes something similar could happen today in downtown San Francisco, which currently has a historic office-vacancy rate of 36.9%, according to commerical real-estate firm CBRE.
“It was exciting,” said Fraley, who was founding director of the Lower Manhattan Residential Conversion Program.
“I had every developer in New York wanting a meeting with me.”
Fraley is now the chief investment officer for Forge Development Partners, which is the exceptional company in San Francisco because it is in the construction-design phase of a project to convert the historic Humboldt Bank Building at Fourth and Market streets from an underutilized office property into 124 apartments for middle-income residents.
Fraley said he looks at the tiny number of homes downtown — on both sides of Market Street — and sees huge potential for more residences given the plentiful public transportation options, the many restaurants, luxury retail and other attractions.
“San Francisco has just unbelievable potential in its downtown, because it has such a strong foundation already,” he said. “Now is a real opportunity to create a vibrant, mixed-use 24-hour neighborhood.”
The honey that attracted all those New York property owners was a combination of time-limited abatements on existing taxes and exemptions on increased values following office-to-residence conversions. Recent studies have shown that the cost of conversions is generally too high to justify the investment without incentives.
San Francisco will have the opportunity next year to pursue its own tax-break initiative inspired by the New York program as a result of a new state law going into effect on Jan. 1.
“It’s funny when I hear people say, ‘Can conversions work?’” said Fraley, who went back to Yale School of Management to get an M.B.A. after a couple of years laying the groundwork for the New York program. “I mean, 12 million square feet of office space was converted in lower Manhattan. The statistics are pretty staggering.”
Fraley said the development activity in New York City led to far higher property-tax revenues once the tax grace periods ran out.
“It was probably one of the best investments in the city’s assessed value, or tax rolls, that had ever been made,” he said.
Sean Campion, director of housing and economic development studies for the Citizens Budget Commission, a nonprofit think tank that did a study of the lower Manhattan conversion program, said that initiative was “unquestionably a success in terms of actually spurring office to residential conversions” and changing a single-use area into a mixed-use neighborhood.
In addition to tax relief, changing regulations to make it easier to do conversions was critically important, he said.
The financial incentives provided were probably more generous than needed at the tail end of the program, after which conversions continued with no tax breaks, Campion said. Overall, however, he said the net payoff to New York appeared to have been positive.
More recently, Mayor Eric Adams’ administration has been seeking regulatory changes to make it easier to do office to residential conversions in more types of buildings and wider swaths of the city, Campion said.
This year, New York state also passed a tax-relief program for conversion projects that include affordable housing.
San Francisco officials have sought to entice conversion activity in part by amending some development rules for converting offices to other uses.
In the case of 785 Market St., Fraley said, the building was particularly well-suited to a conversion because it has relatively small floor plates, along with plentiful light access and working windows, and and it is eligible for historic building tax benefits. Mayor London Breed and other city officials were also extraordinarily helpful, he said.
San Francisco still has a long way to go to counter its reputation as hostile to developers, an image that makes it hard to raise investment capital for projects in The City, Fraley said.
“There’s this mentality that it’s just all about greedy developers squeezing the profit out of buildings,” Fraley said. “The City has to work with the development community to pull us out of this, out of the doldrums here.”
Breed last year introduced an exemption from the transfer tax on the first sale of buildings that have been converted from office to residential use. Voters passed the measure in the March election.
The applications for conversions did not pour in, however, and Fraley said he thinks more financial incentives might be the key — particularly tax relief to owners investing in conversions who see their bills rise when they make property improvements.
“There’s actually a massive disincentive to invest into buildings,” Fraley said. “That’s what the program in New York addressed, and that’s, in my opinion, why it was so successful.”
One potentially significant change on the horizon is California Assembly Bill 2488, a new law tailored specifically for San Francisco by Assemblymember Phil Ting. Sponsored by the Bay Area Council, the law will enable city officials to establish a downtown revitalization and economic-recovery financing district in which developers of conversion projects before the end of 2032 could qualify to get a portion of their property taxes returned to them annually for 30 years.
The law requires projects that get tax revenue to pay prevailing wages and comply with labor standards as adopted by the Board of Supervisors.
Louis Mirante, vice president of public policy at the Bay Area Council, said the legislation was “definitely inspired” by New York city’s previously successful program, and it is “a powerful tool,” one he said he hopes the incoming mayor and Board of Supervisors use, though they could choose not to do so.
Giving property owners tax breaks on increases in the property values incentivizes investment that can stop property values from deteriorating, which hurts city finances, said Mirante, citing reports of downtown office buildings selling for far less than in the past.
“We think with this tool, these projects will absolutely move forward,” he said.
Still, the process for setting up such a financing district will likely take a year or more to set in motion, Ting predicted.
“AB 2488 is a long-term strategy — it’s definitely not a short-term fix,” said Ting, who said he expected that older, smaller buildings would be the ones targeted for conversions, with many newer buildings unsuitable for conversion for various reasons, such as lack of bathrooms and plumbing.
Bringing residents downtown would provide traffic for business owners and enhance the vibrancy of a downtown economy that has been sluggish amid the post-pandemic rise of remote work and fewer people commuting to offices, he said.
Ting’s office has said office and retail conversions could create as many as 14,000 additional homes in San Francisco. The City must add 82,000 new homes by 2031 as part of its state-mandated housing goals.
