Falling Prices Make Conversions More Palatable In S.F., But Regulations Still Pose Challenges
A wave of deeply discounted office sales in San Francisco could open the door to more office-to-residential conversions by making the deals more affordable, but bringing down prices is just one of the hurdles developers face.
Changes to city planning rules would ease the process further, according to panelists at Bisnow's Northern California Multifamily Annual Conference held Oct. 11 at the Hyatt Regency Downtown San Francisco Soma. The process in place within city government now adds to the financial burden, panelists said.
As an example, Emerald Fund founder and chairman Oz Erickson cited a May deal for 350 California St. in which the property sold for $61M, less than one-quarter of its initial asking price.
Trades like that one represent a drop in sales price from over $1K per SF pre-pandemic to $200 per SF, Erickson said. Prices like that represent an opportunity for conversions, but first, the city needs to make some changes, he said.
Those changes should include reducing or eliminating the transfer tax, according to Erickson. For investors to seriously consider office-to-residential conversions, costs need to get down to $700K per door, he said. Right now, the cost is around $1.1M per door.
Erik Murray, Oak Funds and Oak Impact Group chairman and managing partner, agreed the price needs to come down to make conversions enticing for investors, but he was optimistic the city realizes it has a problem.
“You have not seen this much political will to help developers,” he said. “I joke with them that they’re begging us to build housing and to convert. They’re asking us to do all these things and the mechanisms are almost in place.”
Mid 1990s and early 2000s New York City was given as an example of a blueprint San Francisco could follow to bring large amounts of housing to the city. State and local politicians in New York at the time created a program to convert offices in the Financial District to residential buildings, Erickson said.
“During that 10-year period [1995-2005], they converted 18M SF into 18,000 units,” Erickson said. “After all the restrictions ended, the incentives, they converted another 18,000, because the Financial District was an established residential area.”
In addition to converting office buildings, developers in the Bay Area have been pursuing projects that convert market-rate multifamily to affordable housing.
New construction is “relatively dead right now,” according to Chrissie Davis, president of CORE Builders. However, rehabilitations are picking up steam on the affordable side.
“There’s just more and more money getting thrown at it,” she said. “We’ve seen eight rehabs in the last two months, and there’s more and more coming.”
Another positive development is pricing has started to become available earlier, which presents an opportunity for developers to invest in a down market.
“I’ve been recommending both market-rate and affordable housing developments to get your plans ready,” Davis said. “When the project is ready to bid, buy low. I think we’re going to see some pain in early 2024 … but I think there’s a real opportunity in the market to buy low.”
While developers might be able to get assets at a big discount to spur a conversion, adding all these housing units still might be dependent on moves by city officials. Some actions have been taken, like Mayor London Breed's move to ease office-to-lab transitions, but Erickson said others are not addressing the issues.
“It’s an uphill fight with people like Dean Preston and Aaron Peskin,” he said. “They ignore the fact that there are 30M SF vacant in San Francisco.”
