As we first outlined two years ago, from which we haven’t deviated, despite plenty of whining, whinging and uninformed opinion/lobbying pieces from others since: “the conversion of existing office space to residential use currently makes no economic sense for the vast majority of downtown San Francisco buildings. Zip. Zero. Zilch. And it’s not a matter of “demand,” per se, it’s a matter of the relative value of each use and the cost of conversion.”

Or to quote the latest Economic Impact Report from the City and County of San Francisco’s Offices of the Controller and Economic Analysis: “Conversion of office space to housing does not appear to be financially feasible at the moment,” which shouldn’t catch any plugged-in readers, other than the most obstinate, by surprise.

And from the aforementioned economic impact report, was quietly released this past Friday and specifically analyzed the potential impact of Proposition C on the March 2024 ballot, which if adopted would provide an exemption from the City’s Property Transfer Tax for sellers of residential property that was converted from commercial to residential use prior to 2030 and increase the existing limit on new office development: the proposed exemption “is likely too small to close the feasibility gap” and incentivize any office to residential conversion projects that wouldn’t otherwise pencil.

But if market conditions were to change and conversions were to become economically feasible, the proposed exemption, if adopted/passed, “is likely to lead to a negative economic impact, and an extended period before foregone transfer tax revenue is recouped by higher property tax revenue for the City.” Again, that’s according to the City’s Office of Economic Analysis and impact report.

31 thoughts on “The Potential Economic Impact of Proposition C on San Francisco”
  1. I’d be curious to hear a thoughtful analysis of what a legitimate, informed rezoning program would recommend for San Francisco? Would the city benefit from a wholesale rezoning of the financial district + union square? I suspect it would, and perhaps if just confined to these neighborhoods it could be relatively noncontroversial.

    The Bloomberg administration in NYC did this, and legitimately transformed whole neighborhoods. Might one of our esteemed mayoral candidates propose this?

    1. legitimately transformed whole neighborhoods

      Which ones? And before you answer, if I might customize my order: please focus on ones that have transformed in ways that’s SF neighborhoods haven’t, like SOMA or the waterfront going from light industrial to Residential/office.

    2. How are you proposing to rezone the FD and Union Square? The entire area is already zoned some version of C-3-**, which allows high-density residential. The problem is the existence of office buildings that cannot feasibly be knocked-down.

  2. “The finding was based on, among other things, an average acquisition cost for office buildings of $183 per square foot. The average feasibility gap was $267,000 per residential unit. The SPUR report’s estimate for the acquisition cost of office buildings is higher than the $88 per square foot price in the Gupta, Martinez, and Van Nieuwerburgh report, but still lower than most of the prices paid in recent office building transactions in the city…”

    It’s almost as if the market would clear itself if prices were allowed to decline (further), but people are discouraging it b/c a decline in CRE would destroy the city’s finances. Between a thermal granite veneer and a hard place.

    1. As a point of reference, the ten most recent transactions in San Francisco averaged $269 per square foot, with an average 55 percent drop in value for the ten buildings from their previous sales which averaged $594 per square foot.

      1. What is the data set for this (all buidlings, all type B, all…?)

        [The apparent dislike for the “Blockquote” function is disappointing: I’ll not drop my subscription but no Xmas tip!]

          1. So largely the types of building that all but the most oblivious acknowledge aren’t good candidates.Tho I’ll concede a lot of what I still think of as A has aged downward, the data is still skewed upward

          2. So largely the types of building that all but the most oblivious understand make up the majority of vacant space in San Francisco, with the average for recent Class B/C sales still over $210 per square foot (per the City’s data set, not ours).

            All of which brings us back to the City’s conclusion that the adoption of Proposition C wouldn’t move the needle, at least with respect to housing production, but would have a negative economic impact for the City as a whole.

          3. “with the average for recent Class B/C sales still averaging over $210 per square foot (per the City’s data set, not ours).”

            The question being, really, why do these buildings – which can’t rent and aren’t feasible to be converted – continue to sell…at all? Apparently the oblivious, in addition to whining and whinging, have a side hustle of buying property

          4. It’s a lot easier to drop rents and still hit a target IRR, while not defaulting on debt covenants, or to further invest and reposition, when one’s cost basis is 50 percent lower than the last guy (or gal).

  3. We should be focusing on the legitimacy of the “transfer tax” itself. Given that the city leaves property taxes every year and that, generally, property values have increased, increasing property taxes received, there is actually a financial incentive for buildings to trade hands; why the city is able to get a handout beyond the clerical costs of change of title. I’m all for paying taxes, but this one seems blatantly ludicrous, I’d rather see this one go away, and just increase property taxes, or some other mechanic to make up the loss, but just feels gross.

    1. Pretty sure The city can’t “just increase property taxes” without a ballot initiative and a subsequent supermajority approval from voters, due to the third rail of California politics. That state of affairs alone is enough to legitimize the transfer tax. Corporate owners of CRE tend to trade properties at a dramatically slower rate than residential owner/occupiers.

      1. The notion that rezoning downtown will yield change is a bit naive. Downtown is already zoned for high rise buildings with few restrictions. The economics and scale of building needed to justify tearing down dozens of 20-story office buildings, such as to build housing, is massive and not realistic. Those office buildings have to have essentially zero or negative market value, and the residential rents have to be exponentially higher than today’s and construction costs would have to plummet. We’re not even remotely close at today’s much discounted $250/sf. So rezoning downtown to spur tear downs and redevelopment of existing office buildings to solve the office vacancy issue is a silly talking point.

        1. Don’t know why this was posted in reply to that comment, but Great…we’ve agreed. The chief barrier to progress is the historical cost accounting and other mechanisms that allow owners of CRE to pretend that their buildings can bring in their owners “wishing rents” in perpetuity, and the tax benefits of keeping money-losing properties on their books because they can be used to offset profits elsewhere.

          Now, all we need to have happen is for owners to hand their properties back to their lenders, en masse, so that they can be marked to market. Are you holding your breath waiting for that to happen?

      2. Brahma – I don’t think Geube is implying “just increase property taxes” the way you are reading it. I think what Geube is saying is that as buildings trade hands they will be reassessed at new increased values (remember prop.13) and there by the property taxes will increase organically.

  4. 1) Stop approving new office buildings.
    2) Build a huge amount of housing.

    If both of those happen, and the population increases, existing office space will eventually get filled up again. It’s going to be a long road, but everything will work out.

    1. Serious q: I don’t understand how the population can increase if there is no prospect of job increases? (Don’t people live in a city because they work here?)

      110k people left because they can work remote, or hybrid (60k amount returned*). So, where would these new jobs come from – and why would they move to SF if they don’t have to work here? Yes, I get it that SF is a nice place to live, but not great if you need to have a job…. (I live here. I work hybrid. Drive to my office downtown, but I see staff leaving SF to work remote and avoid the expense. I can’t imagine living anywhere else, that’s my problem – Ha!).

      * I don’t recall the exact #’s.

      1. Logic has nothing to do with specualtive manias. Real estate bubblers are motivated mostly by cheap loans and high leverage…”Jobs? Hell, that’ll work its way out. Can you give me another working class, light-industrial neighborhood to gentrify into unproductive waste?”

  5. There is no need for a higher office development cap. We are already oversupplied with office space and are likely to be so for many years. I don’t expect to see any new office building construction this decade.

    1. I think from The Mayor’s perspective, the intention behind raising the cap on office space is pretty simple. In the (according to the editor, highly unlikely) event a meaningful amount of office space gets converted to residential, more office space could then be built to replace the amount converted, thus not resulting in an overall reduction in office space. And new buildings overwhelmingly offer Class A space, which presumably would be replacing Class C or Class B spaces that underwent conversion.

      Personally, I agree with you that we are “already oversupplied with office space” and I also think raising the cap on office space would be unwise. We have Prop M on the books precisely because office building impresarios kept throwing up new office buildings when we had already had a glut in the 1980’s. If you read through that report from SPUR referenced in January’s thread, buried in it was this nugget: “San Francisco has more than 10 million square feet of entitled, approved office space that could be built when the market recovers.”

  6. If the powers that be wanted the conversions to actually happen, I think that this should have written to say: The developer who converts office to residential is the one who gets the additional prop. M footage for commercial. They can use it or sell it to someone else. Maybe they also get the amount of stories of converted added to their ledger as well. Also, possibly need to throw in some expedited review.

  7. It sure seems like a good time for the state to expand UCSF into a full university instead of just a med and law school. Surely office buildings convert into dorms more easily than into condos…

    1. Doesn’t UC already have a full university campus in the Bay Area? I’m thinking they do…but even if I’m mistaken, opening up a new campus isn’t inexpensive…and the System’s finances are already – and always – strained.

  8. Changes to tax policies should be made for the long term, not the short term. Even if Prop C doesn’t immediately close the gap on office to housing conversion feasibility, it very well might down the road. Screaming over and over again that it makes “Zip. Zero. Zilch.” sense right now misses the point, and honestly feels pretty immature. I feel like the author here should know more than anyone how quickly market conditions can change.

    Whether or not we want to reduce tax revenue in order to increase housing is another matter. Personally, I’m for it because we need all the housing we can get. Compared to the city building housing directly, I would imagine a tax break for conversion would be cheaper per unit built.

  9. If a commercial building is worth zero as many of them now are and prices for condos are say $800.. Don’t we just need construction costs to be less for it to be feasible?

    1. Are you assuming that office buildings with an effective market value of zero are actually getting marked to market? By and large, they aren’t (with a couple of recent notable exceptions when the building got handed back to the lender). If the owner and lender work out a deal to “extend and pretend” when the note comes due, the commercial building that is vacant and worth zero never gets recognized as such.

      This site has pointed out a few times over the past couple of years that while 100 Van Ness (the old AAA building) was a successful recent office high rise to residential high rise conversion, it was successful because the cost basis was under $200 per existing ft.². You’re right that now, revenues from selling condos would probably be lower than they were when those units came to market. But if vacant office space were actually marked to market, the cost basis for potential conversion properties would be lower, as well.

      I don’t recall reading about any special cramdowns to lower construction costs on 100 Van Ness.

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