Converting San Francisco\u2019s old downtown office buildings into housing won\u2019t be an easy task, with high costs, clunky floorplates and existing tenants in buildings only a few of the obstacles developers need to overcome.<\/p>\n
Desolate buildings still need to be in places where people want to live. <\/p>\n
\n
\u201cHope is not a strategy,\u201d said Nick Romito, co-founder and CEO of VTS, a leasing and asset-management data company. \u201cThe hope that if you convert it, they will come \u2014well, a lot depends on where that building is.\u201d <\/p>\n
While New York City\u2019s downtown financial district is home to a number of successful office-to-residential conversions, it also takes a vibrant neighborhood, with bustling caf\u00e9s, grocery stores and more.<\/p>\n
\u201cThat is not the same for San Francisco,\u201d Romito said. \u201cThe infrastructure and the cost of converting a building \u2014 that\u2019s part of it,\u201d he said. \u201cBut I\u2019d be more concerned about, even if you can convert it, who wants to live there?\u201d<\/p>\n
In the game<\/h2>\n
Romito speaks with the confidence of a New Yorker about the challenges San Francisco faces. He also has skin in the game, with offices at the Embarcadero Center, one of the West Coast\u2019s largest mixed-use properties, which connects the city\u2019s financial district with San Francisco Bay.<\/p>\n
A decade ago VTS got off the ground, offering a service Romito characterizes as the Salesforce
\n CRM,
\n -0.26%<\/bg-quote>
\n of the office-leasing industry. It was helped along by his Rolodex of top landlords. Romito previously was a broker in New York City\u2019s notoriously feast-or-famine office sector, while in a previous role he oversaw a portfolio of millions of square feet of office space. <\/p>\nThe turmoil in the office properties means many former clients now use his data to help make sense of the coming carnage, while landlords face sharply higher borrowing costs since the Federal Reserve began to rapidly raise target lending rates, a mountain of debt coming due and other tough choices.<\/p>\n
See:<\/strong> The $1 trillion \u2018wall of worry\u2019 for commercial real estate that spirals through 2027<\/p>\n\u201cWhat\u2019s cheaper?\u201d Romito said. \u201cIs it cheaper to add amenities in maybe a zombie building, add a floor or two, to create a better experience? Or is it cheaper to knock the entire building down, rebuild something else, and pray to God you lease it?\u201d<\/p>\n
Cost of the land<\/h2>\n
San Francisco isn\u2019t a big city by global standards \u2014 it ranks just No. 17 in the U.S. by population \u2014 but its recent woes are notorious, from a recent population drain to a local fentanyl crisis to oft-voiced concerns about public safety. Breathing new life into old office buildings sounds like an enticing fix for a shelter problem that has been building to a crescendo, after decades of new housing initiatives being voted down. <\/p>\n
Like other major California cities, the tide of homelessness in San Francisco increasingly includes people who are elderly. The fentanyl crisis ravaging the U.S. makes matters on the ground in San Francisco still worse.<\/p>\n
As Mayor London Breed in June told Bloomberg in a sit-down interview, \u201cThe issues around opioids have done something to our city, and to other major cities, like something that I\u2019ve never seen before.\u201d <\/p>\n
She now wants action to combat the \u201cdoom and gloom everyone is talking about.\u201d As part of that push, Breed called out the tech community to not only \u201cmake money from San Francisco,\u201d but to stick around and invest in solutions to its struggles. <\/p>\n
Warren Wachsberger, CEO of Aecom Capital, a subsidiary of Aecom
\n ACM,
\n +0.01%<\/bg-quote>,<\/span>
\n said revamping old office buildings isn\u2019t that simple. \u201cLess than 1% of all apartment units underway, being built nationally, are office-to-residential conversions, despite everybody\u2019s love affair with them,\u201d Wachsberger said, speaking from Los Angeles.<\/p>\n\u201cMany buildings probably won\u2019t work,\u201d Wachsberger said, observing that thick, concrete office floorplates often need to be drilled through and plumbing and heating systems overhauled, with local building codes adding to the headache. <\/p>\n
\u201cIt\u2019s a lot easier and cheaper to demolish it and start over from scratch,\u201d he said. \u201cThat means buying buildings essentially at the cost of land.\u201d<\/p>\n
Wachsberger said hopes for an expansion of an office-to-residential conversion effort in Los Angeles in the 2000s likely hinge on incentives for developers and the buildings being in places where people wanted to work, eat, live and shop. \u201cUntil that\u2019s able to come back, it\u2019s difficult to create the vibrancy that was there prepandemic,\u201d he said.<\/p>\n
AI and a new direction<\/h2>\n
San Francisco\u2019s downtown core remains hollowed out, even as the city makes a noticeable push for cleaner and safer streets in the wake of the pandemic. The goal is to draw more office workers back to old commuting patterns, enticing them to buy a morning coffee, a sandwich or after-work drink.<\/p>\n
See:<\/strong> Elon Musk\u2019s X \u2014 the former Twitter \u2014 removes illegal sign from roof of its San Francisco headquarters<\/p>\nBut its office vacancy rate remains high at 27.1% through the second quarter, according to Cushman & Wakefield
\n CWK,
\n +1.87%<\/bg-quote>.<\/span>
\n The real-estate firm expects San Francisco vacancies to tick higher through the rest of this year, as some 4 million square feet of leases expire.<\/p>\nAs part of its turnaround effort, the city has been getting tougher on open-air drug use in recent months. Over the longer term, it plans to cut homelessness by half in the next five years, revamp downtown zoning and eventually convert unloved office buildings to other uses, including housing. <\/p>\n
There also has been a lot of buzz this year around artificial-intelligence technologies, which has been a boon to big companies like Apple
\n AAPL,
\n +0.32%<\/bg-quote>,<\/span>
\n Amazon
\n AMZN,
\n +1.11%<\/bg-quote>,<\/span>
\n Alphabet
\n GOOG,
\n +0.08%<\/bg-quote>,<\/span>
\n Microsoft
\n MSFT,
\n -0.72%<\/bg-quote>,<\/span>
\n Meta
\n META,
\n -2.11%<\/bg-quote>,<\/span>
\n Nvidia
\n NVDA,
\n -0.04%<\/bg-quote>
\n and Tesla
\n TSLA,
\n +0.37%<\/bg-quote>,<\/span>
\n while also sparking a broader stock-market rally.<\/p>\nSee:<\/strong> VC spending is in a tailspin, and AI can\u2019t reverse the trend \u2014 yet<\/p>\nGabriella Sierra\u2019s team of researchers at Cushman & Wakefield in San Francisco said in a second-quarter outlook that AI\u2019s anticipated expanding presence might partially revive the tech industry\u2019s footprint in the city. <\/p>\n
But AI isn\u2019t likely a cure-all for the city\u2019s financial woes, particularly with San Francisco projecting its budget shortfall to widen to $1.3 billion by fiscal year 2027\u201328. <\/p>\n
Romito said that despite a \u201cbit of a renaissance\u201d in office-leasing demand in the past quarter by businesses with an AI focus and venture-capital funding, it isn\u2019t likely \u201cenough to carry a market.\u201d <\/p>\n
Stocks closed higher on Monday, with the S&P 500
\n SPX,
\n +0.15%<\/bg-quote>
\n and Nasdaq Composite Index
\n COMP,
\n +0.21%<\/bg-quote>
\n scoring the strongest seven months to start a year in decades. The Dow Jones Industrial Average\u2019s
\n DJIA,
\n +0.28%<\/bg-quote>
\n rally has been more modest; it\u2019s up 7.3% on the year so far, according to FactSet.<\/p>\n<\/p><\/div>\nRead the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Converting San Francisco\u2019s old downtown office buildings into housing won\u2019t be an easy task, with high costs, clunky floorplates and existing tenants in buildings only a few of the obstacles developers need to overcome. Desolate buildings still need to be in places where people want to live. \u201cHope is not a strategy,\u201d said Nick Romito, […]<\/p>\n","protected":false},"author":1,"featured_media":42879,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-42878","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\n
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