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Why empty offices aren't being turned into housing, despite lengthy vacancies

"There's a Goldilocks factor": Older offices can be too big or too small.
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San Francisco commercial office buildings are emptier than they have been in decades.David Paul Morris / Bloomberg via Getty Images

SAN FRANCISCO — Strachan Forgan, an architect who works downtown at 255 California St., is still struck by how much street life has changed around his office building. Gone are the pre-pandemic crowds of bankers and lawyers who jammed into the famed Tadich Grill across the street from his office. In recent months in his two-block walk from the nearby train station, he said, he has frequently been verbally assaulted and physically threatened by the rising number of homeless people.

That's because even though San Francisco commercial office buildings are emptier than they have been in decades and the city is estimated to have 8,000 homeless people, it's unlikely that any of the empty offices will become homes for anyone at any economic level, even though more housing is desperately needed in general. Forgan, who both works on office-to-housing conversions and struggles to find employees who can find affordable housing to work at his firm, said it's too difficult to make happen.

"It almost takes the stars to align," he said. "It's a unique set of circumstances that makes sense. So that's why it is relatively rare."

Such conversions aren't happening in the rest of the country, as well. Planning departments of major cities, including San Francisco; San Jose, California; Seattle; Phoenix; New York; Fort Worth, Texas; Dallas; and Houston, said there are very few, if any, new attempts to turn existing offices into housing. Over the last two years, even during the height of the pandemic, there have been just a handful of such conversion applications in those cities, building officials said.

Empty offices in a building on a Google campus in Sunnyvale, California, on April 21, 2021.
Empty offices in a building on a Google campus in Sunnyvale, Calif., on April 21, 2021.David Paul Morris / Bloomberg via Getty Images

The New York City Department of Buildings has received just 100 project applications for commercial-to-residential conversion since Jan. 1, 2020, said Andrew Rudansky, the agency's spokesperson. Just 12 have been filed this year.

"This includes applications for large expansion and conversion projects for the entire building, as well as applications for smaller projects that only change the use of a single floor or part of a building," Rudansky said by email.

Even in cities like San Francisco, where homelessness remains a major challenge and office vacancy is relatively high, developers, property owners and city officials don't think conversions make financial sense in the long run.

"There's definitely an incentive for cities to continue to promote vibrant central business districts that are centered around employment," said Manan Shah, an architect in Oakland, California, with Gensler, a firm that has worked on and studied such conversions for years. "We would need to see a long-term trend and vacancy was high for a number of years for somebody to take the time to go through the conversion process."

A man walks past an empty office building in the midtown area of Manhattan on Jan. 25, 2021.
A man walks past an empty office building in the midtown area of Manhattan on Jan. 25, 2021.Angela Weiss / AFP via Getty Images

Empty buildings

High office vacancy rates are plaguing cities nationwide, according to Avison Young, a commercial real estate firm. In the second quarter of this year, the commercial vacancy rate across San Francisco reached 15.4 percent, more than the 12 percent figure last year and more than double what it was just two years ago.

Phoenix's office market vacancy is "elevated" at 16.2 percent, while Miami is at an "eight-year high" of 16.9 percent and Los Angeles has reached "all-time highs" of 17.8 percent. Meanwhile, New York City is at a "post-2000 high" of 19.2 percent vacancy, and Houston is at a "record high" 22.9 percent of such workspaces that are going unused.

At the same time, the number of homeless people is as high as it has ever been in the U.S. — over 560,000. More than a quarter of them are Californians. About 161,000 people are experiencing homelessness in California, more than in any other state. While Gov. Gavin Newsom signed a historic $12 billion bill to address homelessness, much of the money is likely to be used to convert older hotel and motel rooms.

The Friendship Garden homeless encampment in Santa Cruz, Calif., on May 5, 2021.Carlos Avila Gonzalez / San Francisco Chronicle via Getty Images

Reasons not to change

In parts of the country where land is relatively cheap, it's far less expensive to build housing from scratch than to convert old offices. And some cities don't mind having empty offices.

"The overall economy is going well for us and we have a low office vacancy rate," Alan Stephenson, director of the Phoenix Planning and Development Department, said by email. "It is hard for the economics to work for a developer to give up the more lucrative office rents in exchange for housing units."

Stephenson's agency approved two office-to-residential conversions that are in progress. But they will add just 225 new housing units in a city of 1.63 million people.

"You combine this market reality with the large amount of underutilized land where it is cheaper to build a new four- to five-story apartment complex than convert an existing office building to housing," he said.

Often, real estate and architectural experts say, the bureaucratic processes are too difficult and the conversions are too costly, and many developers and property owners would rather wait out the pandemic than begin a yearslong process.

Developers also note just how important timing is. Marc Babsin, a developer with the Emerald Fund, a real estate development firm in San Francisco that has worked with Forgan and his firm, SCB, on multiple projects, said the groups worked together on the city's largest commercial-to-residential conversion so far: a 2015 project at 100 Van Ness in San Francisco.

That was a 1970s-era concrete-laden monstrosity adjacent to City Hall that was once the offices of the California State Automobile Association. Today, a 600-square-foot, one-bedroom apartment in the shiny glass building rents for around $4,000 a month.

A view of City Hall from one of the open units at the 100 Van Ness apartment building on March 19, 2021 in San Francisco.
A view of City Hall from one of the open units at the 100 Van Ness apartment building on March 19, 2021 in San Francisco.Gabrielle Lurie / Hearst Newspapers via Getty Images

"You need a bunch of factors to come into line to make that work, and they happened to do that at 100 Van Ness," Babsin said, noting that the project began in 2012, in the wake of the Great Recession, and took three years to complete.

"A couple years later, [100 Van Ness] would have made more sense as an office," he said.

Often, such conversions work only in dense cities where land is at a premium, and even then, only certain kinds of buildings can be converted. Finally, even when such conversions do happen, the bulk of the apartments will usually be rented at high market-rate prices. While it may seem like all that empty space would be better used for unhoused people, architects must navigate challenges like finding the right amount of space between a building's elevator bank and its windows.

"There's a Goldilocks factor: The floor plate can't be too small, and it can't be too big," said Kristina Garcia, a researcher with the real estate brokerage Cushman Wakefield, using an industry term for the leasable space on a given floor of a high-rise office tower. "There's limiting factors to why adaptive reuse hasn't happened as much."

Most modern office buildings have floor plates of about 25,000 square feet — about half the size of a football field — a figure that has generally crept up over the decades. More recently built high-rise office buildings are often considerably larger than their decades-old counterparts.

Gensler, the architectural firm, recently concluded after a study of building stock in Calgary, Alberta, that "the worse the office building, the better candidate it is for conversion to residential," particularly in a city where the office vacancy rate is at a stunning 32 percent. Typically, that means that older and often more run-down buildings are ripe for conversion.

"For modern office buildings, the concept was to build the largest floor plate you could," said John Cetra, a New York City-based architect whose firm, CetraRuddy, has worked on several notable conversion projects in recent years, including 20 Broad Street, near Wall Street in lower Manhattan.

The office tower, which was built in 1957 and is connected to the New York Stock Exchange, reopened in 2018 after the conversion was completed. The age of the building means the distance from the elevators to the edge of the building, known as a "lease span," is a maximum of 45 feet, at about the edge of what is practical. In other words, newer office buildings are often too large to be used as residences — substantial parts of their interiors would have little natural light.

"The donut around the building is the habitable zone. What do you do with the interior space?" Cetra said.

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An empty workstation inside an office building in San Francisco on June 9, 2021.David Paul Morris / Bloomberg via Getty Images

Limited numbers

While Forgan's firm, SCB, also completed a similar conversion of 1132 Bishop St. in downtown Honolulu and is evaluating a "confidential high-rise conversion" in downtown Los Angeles, he said the projects represent a very small percentage of the firm's overall portfolio.

"We do a lot of multifamily high-rise projects, and probably 90 or 95 percent of them are new construction," he said, saying that is where the money is. "They tend to be urban. They tend to be aimed at the more luxurious end of the market. So they tend to be new construction ground up rather than adaptive reuse projects."

He said such buildings are within a "sweet spot" that makes them ripe for conversion. He said that in the case of the Los Angeles conversion, the property owner has a lot of vacant office space.

"He has empty office space that will be more valuable as residential," Forgan said.

Growing interest

In Dallas, James McKey, the city's interim assistant building official, said that while there was a dip in applications for such conversions last year, there seems to be renewed interest this year to turn office buildings into mixed-use properties.

In 2019, 19 applications for conversions were submitted to the city, which collapsed to just three last year. However, this year it has picked up again, reaching 12 to date. The jump in applications may be bolstered by a recently completed conversion of what used to be called the First National Bank tower, a 52-story building dating to 1965. It had been closed for the bulk of the previous decade.

The newly revamped tower, now called The National, is part hotel, part apartment building, part offices and part retail.

"Me being an older Gen Xer, I wouldn't rent an apartment in The National for $3,000 a month," McKey said. "But the generations behind me — as soon as one comes up they want to — it's a paradigm shift. There are people that are jumping at the chance to live downtown — it's too noisy for me — but I guess if you're on the 52nd floor it doesn't matter."

California dreams

Back in California, as the state tries to tackle the decades-old problem of too little housing for too many residents, the answer for some developers has been to avoid office conversions and concentrate on changing other types of properties.

The tactics are as diverse as the state's plan to adapt motels, to reusing ground-level retail spaces as housing, to allowing for religious entities to build on their own land, to even a grand proposal to streamline the process to convert old big-box-style retailers.

The bill, known as SB 6, would explicitly allow for residential development on previously commercial land, like shopping malls or big-box retailers. A recent analysis by Urban Footprint, an urban planning software company, concluded that the bill, if enacted, could "increase market-feasible capacity by as much as 2 million new homes while generating substantial fiscal benefits to cities."

The author of the bill, state Sen. Anna Caballero, who represents a large swath of agricultural communities between San Jose and Fresno, points to a years-old empty Kmart in Salinas, a farming town where she was once mayor.

"You could just take out the Kmart and put single-story retail and condos above or take out the whole store," she said. "Make it feel like something that people would want to walk through!"