Bottom Line, Conversion of Office To Residential Usually Not Financially Feasible

SPUR and ULI San Francisco along with Gensler and HR&A Advisors did a study regarding the feasibility of converting office buildings to residential projects. “Because of their physical characteristics, office buildings in San Francisco are stronger candidates for conversion than office buildings in other cities in North America. For projects to be financially feasible, the value generated from rental income must exceed the cost of development. Since the onset of the pandemic, construction costs have escalated rapidly, while apartment rents have dropped by about 10 4 including labor and materials, are estimated to range from $472,000 to $633,000 per unit — without seismic upgrades.  Soft costs, which include city fees, range from about 20% to 40% of total project development costs. Given today’s costs and potential revenues, a residential conversion would generate less value for the property owner than maintaining the office use, even given high office vacancy. If residential rents rise to pre-pandemic levels, owners of the most distressed office buildings would likely have a viable pathway to convert to housing. However, the economics of redevelopment would still be challenging without further cost reductions.”  Bottom line, even though the concept looks like it is killing two birds with one stone, ie solving both the oversupply of office space and the tremendous demand for more housing, without huge government subsidies, less stringent inclusionary housing, reducing impact fees,  and simplifying/reducing planning and building code requirements,  it is economically not feasible.