San Francisco welcomes transformation of offices into apartments
By Elizabeth Hayes
Bloomberg News Service
SAN FRANCISCO — In a concrete tower on San Francisco's Market Street, where employees of such Internet companies as IXL Enterprises Inc. once toiled, developers are building the city's latest hot product: apartments.
Tishman Speyer Properties LP is converting the top half of the 40-story building at 575 Market to housing from offices left vacant in the dot-com bust. "Housing in San Francisco so far has been a very, very strong performer," said Tishman Managing Director Ezra Mersey.
Developers that bought or built offices to capitalize on the 1990s Internet boom, when rents more than doubled in less than four years, are seeking refuge in housing. San Francisco office rents have fallen 60 percent from a peak of $80.16 a square foot two years ago, more than any other U.S. city, broker Cushman & Wakefield said. About 15 million square feet of space is vacant, equal to all the offices in Portland, Oregon.
Equity Office Properties Trust, the largest U.S. office building owner, said this month that it ended a two-year venture to build San Francisco offices after investing $253 million only to have vacancies soar. While costs to retrofit office buildings can limit the payoff on conversions, developers and brokers say the strategy is preferable to losing money on an empty building.
"These people are sitting with an asset saying, 'What should I do about this?' " said Paul Zeger, president of Pacific Marketing Associates in San Francisco.
The transformation of offices into homes will help ease what the Federal Reserve Bank of San Francisco ranks as the nation's tightest housing market, analysts said. Only 14 percent of residents can afford the median home price, $568,000 in the city. Nationwide, 58 percent of residents can pay their local median rate, the California Realtors Association said.
Residential rents in San Francisco are higher than in any city except New York, rising 0.5 percent to an average $1,832 a month in the fourth quarter from the third quarter, apartment research company RealFacts said. U.S. apartment rents fell 0.4 percent to $905 in the fourth quarter from the previous quarter, according to Reis Inc.
The increase in city apartment rents signals the end of a 6.9 percent decline in those rents from the year-earlier fourth quarter as companies fired workers, analysts said. No other city is positioned like San Francisco for conversion to housing from offices, analysts and developers say.
"We experienced a more pronounced cycle than any place else," said Tom Sullivan, former president of the dissolved venture with Equity Office. "There was so much venture capital funding jobs. When the jobs went away, it left us with a high vacancy rate."
San Francisco has the highest imbalance between jobs and housing in the country, even after 150,000 jobs were lost in the region in the past two years. An average of 3.8 jobs were created for every new house or apartment, more than double the 1.3 national average, the Federal Reserve Bank of San Francisco said.
Housing costs have been driven up by a lack of supply in a city with 760,000 residents, said John Crapo, a director at the San Francisco Center for Economic Development. "The minimum we should be producing is 3,000 units a year and we haven't done that in 12 to 14 years," he said.
Neighborhood activists in working-class neighborhoods southeast of downtown want housing that will sell or rent below market rates because the Internet boom displaced longtime residents, small businesses, artists and nonprofit organizations.
The city requires at least 10 percent of each housing project of 10 or more units to be priced at below the market rate, a requirement some residents want raised, said Gerald Green, the city's planning director.
