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Office-to-Housing Conversion: State and Local Efforts to Revitalize the Downtown

May 12, 2023 Articles
The Registry

Originally published in The Registry.

As office vacancies soar in traditional downtown areas like San Francisco’s Financial District, state and local officials are moving quickly to adopt incentives they hope will bring people back into these once bustling neighborhoods. While demand for office use has fallen off sharply, the Bay Area’s housing crisis continues unabated. Converting underutilized office buildings to housing could potentially address both crises at once.

Against this backdrop, Assemblymember (and former San Francisco Supervisor) Matt Haney has introduced the “Office to Housing Conversion Act” (AB 1532). The proposed legislation would, in most cases, allow for such conversions as a matter of right, regardless of any local zoning that would otherwise restrict residential development.

In addition, the bill would make approvals for office-to-residential conversion projects ministerial, which would take them outside the scope of CEQA review. Haney has said the bill is meant to address “the growing crisis of California’s rapidly emptying downtowns and the huge need for new housing statewide.”

The new law would require fast-tracking the application process, with local jurisdictions having a maximum of 90 days to respond to conversion applications. Other additional developer-friendly benefits include allowing project proponents to pay applicable impact fees over 10 years, establishing a grant fund to assist with project financing, and requiring that only 10% of the proposed units be affordable to low- and moderate-income families (far less than the requirement for new projects in many jurisdictions, including San Francisco).

In San Francisco, local officials have proposed two new ordinances meant to spur office-to-housing conversions and re-populate increasingly empty downtown office buildings. The first ordinance, proposed by Mayor London Breed and Supervisor Aaron Peskin, incentivizes the conversion of vacant office and commercial buildings into housing while also broadening the types of uses permitted by-right in commercial zones. The ordinance would require eligible projects to:

1. be located in commercial zones in the Downtown, South of Market Street, and Union Square neighborhoods,
2. not utilize density bonus incentives,
3. limit building floor area expansions to no more than 33 percent, and
4. not add more than one vertical story.

Under the draft ordinance, office- or commercial-to-residential conversions would not be subject to density maximums and waivers would be available for various Planning Code requirements including rear yard setbacks, open space, unit mix, and transportation demand management plans. To streamline the entitlement process, public hearings for these projects would only be required if a project is proposing a building taller than 120 feet. Similarly, certain landmark and historic preservation procedures would be approved administratively rather than at a public hearing. The San Francisco Fire Department and Department of Building Inspection are currently working on administrative bulletins that will outline their procedures and requirements for these conversions.

To help diversify the commercial uses in these areas, the legislation also proposes to expand the list of allowed uses to include laboratories, life science, light manufacturing, animal hospitals, senior housing and residential care facilities, outdoor entertainment, open recreation areas, and trade schools. Temporary use authorizations or “pop ups” would be permitted for up to one year and may include retail, art and entertainment uses. In addition, intermediate length occupancies (ILOs) and live-work spaces would be principally permitted in reuse projects.

The second ordinance, introduced by Supervisors Matt Dorsey and Ahsha Safai, would reduce impact fees for commercial-to-residential conversion projects by eliminating all development impact fees, with the exception of inclusionary housing fees, if applicable. The eligibility criteria under the impact fees waiver ordinance are identical to those proposed under the adaptive reuse ordinance described above.

The introduction of these state and local legislative policy interventions come at a time when property owners, cities, and real estate professionals are all grappling with the practical and financial feasibility of office-to-residential conversions. The San Francisco-based architecture firm, Gensler, recently released a report identifying 12 downtown San Francisco office buildings that it argues could be converted to residential uses, resulting in approximately 2,700 housing units.

Industry experts agree that without additional incentives or public subsidies, the cost of conversion will not be feasible for most properties. Reductions or waivers of impact fees, temporary property tax abatements, and relaxation of affordable housing requirements have all been cited as important incentives policymakers should evaluate as a way of making conversions (and other downtown development) viable in the current economic climate.

While the proposed legislative packages may not, by themselves, clear the way for a wave of office conversions, they could provide valuable regulatory relief and costs savings for conversion candidates. Together with a range of other state and local reforms like those described above, these new proposed laws could help property owners reprogram their underperforming office buildings as sorely needed housing. We will continue to track these items as they move through the legislative process in Sacramento and San Francisco, respectively.

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