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New study: Converting office space to housing is not economically feasible

On Behalf of | Mar 14, 2024 | Real Estate Development |

For many years, housing costs in San Francisco have been among the most expensive in he world. Analysts describe this situation as a matter of supply and demand: There just aren’t enough housing units for all the people who want to live here.

More recently, another phenomenon has rocked the city’s real estate market: Office buildings downtown are experiencing high vacancy rates. This means fewer workers downtown. Lunch spots and other small businesses that cater to these workers are struggling, and there’s lots of talk about downtown being in trouble.

Some observers thought it would be wise to use one problem to help solve the other. They have proposed converting office spaces to housing.

A study published late last year found that a large number of office buildings, particularly in the Financial District and Union Square areas, are suitable candidates for conversion to residential real estate. Many San Franciscans like the idea. Voters recently passed a measure known as Proposition C, which is meant to make these conversions more attractive to property owners by exempting them from some taxes.

City Controller’s report

However, not everyone is convinced that conversions are the wave of the future.

City Controller Ben Rosenfield recently published an economic impact report which found that conversions are not economically feasible. Incentives, like those offered by Proposition C, aren’t enough to make the idea worth the expense, according to the City Controller’s report.

One problem, the report found, is that the city’s housing market has also fallen recently — not by as much as the commercial market, but enough to reduce the potential profit margins involved in conversions. The report found that Proposition C’s tax exemption would lower the cost of an offices-to-condominiums conversion by only about 2%. For offices-to-apartments conversion, the savings could be about 6%. These numbers might add up to a significant amount of money for a large project, but they are unlikely to provide the kind of incentive necessary to inspire landowners to make a significant number of conversions, according to the report.

However, some analysts point out that changes to the zoning laws could provide further incentives, potentially making conversions more economically attractive.