March Ballot Measure Unlikely to Drive SF Office Conversions

San Francisco Mayor London Breed’s March ballot measure that aims to encourage developers to turn empty offices into homes won’t likely spur such conversions.

That’s the conclusion of a city analysis of Measure C, which would waive transfer taxes on converted buildings sold for the first time to help boost housing and lower the city’s record office vacancy, the San Francisco Chronicle reported.

The City Controller’s Office concluded the measure won’t likely save developers enough money to help them turn a profit, according to an economic impact report. If market conditions shift, allowing more office conversions, it could result in less tax revenue because of fewer jobs.

“Conversion of office space to housing does not appear to be financially feasible at the moment, and the proposed incentive is likely too small to close the feasibility gap,” the report said.

The city’s dour forecast comes as a handful of developers ponder converting Downtown office properties into homes, according to the Chronicle. Real estate experts have said it won’t solve the city’s 35.9 percent office vacancy, driven by a shift to remote work.

There could be more effective ways to boost housing growth than a tax break, according to the office led by outgoing Controller Ben Rosenfield, including “zoning changes that could be economically and financially beneficial to the city.”

There’s still too wide a gap between buying and redeveloping San Francisco offices — among the most expensive in the U.S., even after post-pandemic fire sales — and money to be made on apartments and condominiums. The high cost of construction comes as market demand for rental housing has weakened.

Downtown condos now sell for an average $1.2 million, or $903 per square foot, and the tax incentive from Measure C would result in a $9,000 per unit tax exemption, or $6.77 per square foot, the Controller’s analysis found.

Apartment buildings, which are sold in bulk and generally subject to a higher transfer tax rate, would be expected to save around $33,360 per unit, or $41 per square foot.

That would result in only a 2 percent reduction in development costs for condos or a 6 percent reduction for apartments, based on a recent cost analysis by think tank SPUR, cited in the report.

If Measure C passes and leads to conversions, the city would likely lose tax income as uses shift from offices to housing, according to the Chronicle. That’s because of an expected loss in business taxes, which wouldn’t apply to residents, on top of the loss in transfer taxes.

Annual property taxes are expected to grow following renovations, but it would take years for the city to recoup the revenue from the tax break — an estimated 102 years for converted apartments.

So Measure C could be a lose-lose proposition — with limited incentives now for developers to convert offices into homes, and a loss to San Francisco’s tax coffers if they eventually do.

“If market conditions change in the future, and conversions do become feasible, the proposed incentive 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,” the report states.

The city didn’t crunch the numbers for other economic benefits to office-to-home conversions Downtown, including foot traffic for local businesses and economic diversity.

— Dana Bartholomew