SF could waive affordable housing requirements to turn offices into homes

Matt Dorsey
Supervisor Matt Dorsey has introduced legislation that would waive affordable-housing requirements for projects seeking to turn offices into homes.Craig Lee/The Examiner

San Francisco elected officials are poised this year to consider two more steps aimed at removing financial obstacles to office-to-housing conversion projects — one to exempt them from development fees and affordable- housing requirements, the other to take advantage of a new state law allowing property taxes to go back to such projects.

The mass adoption of remote work in the wake of the COVID-19 pandemic had a devastating impact on downtown San Francisco’s economy, with an estimated 147,303 fewer office workers visiting the area than they once did, according to a 2023 city report.

With many office buildings still standing largely empty — particularly older ones lacking amenities — city and state officials have been trying through various means, such as waiving planning-code and tax requirements, to make it easier to convert underutilized office buildings into housing. The goal is not only to house more people but also to diversify the economic life of downtown.

San Francisco voters responded in March by approving Proposition C, a measure to incentivize conversion of up to 5 million square feet of commercial buildings to residential use by waiving real-estate transfer taxes.

There was no resulting rush of development, however, with development costs typically still cited as prohibitive amid increased pricing for construction and financing.

Proposed city legislation now pending at the Board of Supervisors, which would waive development impact fees and inclusionary housing requirements, was introduced last September by former Mayor London Breed and Supervisor Matt Dorsey, whose District 6 includes much of The City’s downtown. Inclusionary housing requirements are designed to help fund below-market-rate housing, but developers say they can make projects infeasible.

The San Francisco Planning Commission in December recommended approval of Dorsey’s proposed ordinance with some modifications, with five members voting in support and two opposed.

Breed and Dorsey said in introducing the measure that it would eliminate the largest source of city-imposed costs on commercial-to-residential projects, estimated to typically amount to between $70,000 to $90,000 per unit.

Dorsey said in an interview he was hesitant to talk about the ordinance in detail because he wanted to consult with stakeholders and Mayor Daniel Lurie’s new administration “to make sure that we’re all on the same page before scheduling a hearing.” Dorsey said he was expecting soon to meet with Ned Segal, Lurie’s newly appointed chief of housing and economic development.

Mayor Daniel Lurie at his Inauguration Day banquet celebration at the Far East Cafe in Chinatown, San Francisco on Wednesday, Jan. 8, 2025. Craig Lee/The Examiner

Dorsey emphasized that he supports The City’s goals for developing affordable housing.

“So we’re not giving up on that — but if getting something unstuck [with office conversions] means making modifications to the inclusionary housing requirement, I’m all for it,” he said. “Let’s get housing production going so we can keep the comeback going.”

Dorsey echoed a city document providing background on the proposed ordinance that reported developers and urban-planning advocates had identified three financial barriers to adaptive reuse projects for turning office buildings to residential use — transfer taxes, property taxes and inclusionary housing requirements.

In mid-2023, The City launched a commercial-to-residential adaptive-reuse program that waived certain planning requirements for specific areas lining Market Street and near the northern waterfront up to Fort Mason.

Under that program, The City has approved only two conversion projects — one to create 124 dwelling units in the historic Humboldt Bank building at 785 Market St., and another to create 45 dwelling units in the historic Warfield Building at 988 Market St.

Mark Shkolnikov, a principal with Group I, the company behind the proposed Warfield conversion, told planning commissioners that currently the project “does not pencil,” but waiving development and inclusionary housing fees would represent “a massive step in making our conversion feasible.”

Bringing more life into the building could help deter vandalism and burglaries of the sort that have repeatedly occurred at the property, he said.

Marc Babsin, a principal and president of the Emerald Fund — the company that converted the former American Automobile Association headquarters tower on Van Ness Avenue into more than 400 apartments in 2015 — testified that his company has studied numerous buildings of late but that current costs made office-to-residential conversions impractical.

“Right now, nothing works,” Babsin told the planning commission. “And so this actually could help get projects converted and get people downtown.”

On the other side, Charlie Sciammas, then the policy director at the Council of Community Housing Organizations, argued in December that the proposed ordinance was misguided.

“We’re supportive of efforts to convert commercial to residential uses. However, we oppose doing so on the back of our city’s affordable housing strategies,” he said. “A critical strategy to facilitate the production of affordable housing units, particularly in a moment of public budget scarcity such as the one we are currently facing, is through inclusionary housing requirements.”

In 2023, The City streamlined its permitting system, allowed projects to defer payment of fees, cut fees by 33% for projects approved by November of 2026 and reduced inclusionary housing requirements for all housing projects citywide.

In addition to Prop. C waiving transfer taxes on conversion projects, state policymakers have also set the stage for The City to lower tax burdens on such developments.

City and state officials have been trying through various means to make it easier to convert underutilized office buildings into housing.Jeff Chiu/Associated Press

Assemblymember Phil Ting authored Assembly Bill 2488, which allows The City to create a downtown-revitalization and economic-recovery financing district in which developers of commercial-to-residential conversion projects could qualify to get a portion of their property taxes returned to them annually for 30 years.

The law, sponsored by the Bay Area Council, went into effect Jan. 1 — but to implement it, San Francisco must now adopt legislation to create a downtown financing district. The law requires projects that receive tax revenue to pay prevailing wages and comply with labor standards adopted by the Board of Supervisors.

Meanwhile, The City’s office market has remained grim, with vacancies rising to successive record highs through much of last year before falling slightly at the end, according to preliminary data.

The office-vacancy rate rose slightly in the third quarter of 2024 to hit a new record of 36.9% and then declined to 36.7% in the fourth quarter, according to early figures released by real-estate company CBRE. Retail vacancies also hit peaks amid a weak convention year and flagging tourism.

Even in the first quarter of 2024, office vacancies were already up fivefold across the greater downtown area compared with the first quarter of 2019, according to findings cited in the proposed ordinance.

Jacob Bintliff of the Mayor’s Office of Economic and Workforce Development told planning commissioners that The City had about 32 million square feet of vacant office space, the equivalent of about 22 Salesforce towers.

City officials estimate about 13 million square feet of that total is “functionally obsolete,” he said.

“That is why, as you’re all familiar, that office-to-housing conversions are one of the key parts of our downtown recovery efforts,” Bintliff said.

Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *