Planning Ahead
by M. Brett Gladstone
The latest trend in the San Francisco real estate industry is the conversion of Class B, mostly historic, office floors into residential units. Over three million square feet of office buildings have either been converted to residential buildings in the past three years or are in the process of conversion. This is happening in small neighborhood commercial zones, along Market Street north of Van Ness, and all over downtown. Most of these office floors have been vacant since the end of the dot-com boom. Housing downtown, for example, can now draw $600 to $950 per square foot when sold as condominiums.
Some of these new residential units are quite small, known as market-rate single room occupancy (SRO). These units can have a kitchen and/or bath, but they must be no more than 350 square feet. The advantage is that by designating them as SROs, sometimes 50% more units may be allowed per building. However, most units are one- or two-bedroom apartments of 800 to 1,200 square feet per unit. Keep in mind that rent control does not apply to these units because they have been turned into housing after 1979. The Planning Department approval process is quite easy, for housing is an allowed use in most of these districts. Variances are sometimes needed, however, since downtown office buildings that undergo residential conversion rarely provide the required number of parking spaces, the required amount of open space (decks, roofs or backyards), or the properly dimensioned cube of open space necessary outside most windows. Nonetheless, the Planning Department is quite likely to issue the required variances, because one of the department’s goals is to encourage the creation of a 24-hour downtown scene enlivened by new residential occupants.
On the other hand, compliance with building- and housing-code requirements may be more challenging. Building owners must comply with the latest code requirements for apartment units. They must, however, keep in mind that the city personnel who administer these particular codes do not necessarily have as a goal the creation of new housing downtown. One way for owners to reduce expenses is to request that the bureaucrats implement the State Historic Building Code, which allows an owner to use more historically sensitive (and often cheaper) solutions.
Another way to deal with this challenge—although seldom used—is to limit the residential use of an office unit to one-quarter to one-third the amount of the total square footage. Through this approach, a building owner asks the Department of Building Inspection to continue to treat the occupancy as a commercial one rather than a residential one, for the latter triggers the cost of the Housing-Code compliance. This is possible when the building owner requires the occupant to conduct work activity in the space, with the sleeping area limited to a small portion of the total space. (These are not live/work units, which are currently illegal in San Francisco). This has been successful mostly in the depressed, yet historic mid-Market Street area, where many students and first-time wage earners want to spend little on rent and can tolerate conditions that resemble dormitory-style living. The cost of renovating office spaces into full luxury apartments may be $250 to $400 per square foot, but the cost of creating these accessory housing units as part of office spaces are a small fraction of the costs for luxury units.
This trend resembles what has been happening in the Wall-Street area of Manhattan for the past 10 years. Unlike Manhattan, which is not suffering the loss of major corporations in these Wall Street buildings, the appearance of the same—in San Francisco—often reflects the corporate exodus to the suburbs.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. The author does not intend the text of this article to provide legal advice to the reader who should seek the advice of professionals regarding the specifics of their project. M. Brett Gladstone is a partner in the San Francisco real-estate law firm of Gladstone & Associates, a firm that works exclusively in the areas of real-estate and land-use law. He can be reached at 415-434-9500. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.