SF’s New Law Aims to Jumpstart Office-to-Residential Conversions

San Francisco is taking a major step toward revitalizing its downtown by making office-to-residential conversions more feasible. With office vacancy rates at record highs and a pressing need for more housing, city officials are introducing policies designed to streamline conversions, removing key financial and regulatory barriers that have long stalled development.

The new ordinance, which recently passed its first vote by the San Francisco Board of Supervisors, eliminates city-imposed fees—most notably, the inclusionary housing fee—that developers say have made conversions financially unviable. The goal is to unlock opportunities for repurposing underutilized office buildings while helping meet California’s housing targets.

San Francisco’s Housing Challenge and the Need for Conversions

The city has been tasked with building 82,000 housing units by 2031 as part of a state-mandated initiative to combat California’s housing shortage. Yet, despite multiple efforts to incentivize development, new construction remains sluggish. In 2024, only 1,200 new housing units were completed—less than half of the 2,593 homes built in 2023, according to city data.

While cities like Washington, D.C., and New York are leading the way in office-to-residential conversions—with over 5,000 units each in progress—San Francisco has struggled to gain traction. A 2024 study by RentCafe and Yardi Systems Inc. ranked the top U.S. metro areas for conversion projects, and San Francisco didn’t even make the list.

Overcoming Financial and Bureaucratic Hurdles

San Francisco has taken steps to encourage adaptive reuse, including passing a 2024 ballot measure that eliminated transfer taxes on conversion projects. Former Mayor London Breed also introduced the “30X30” initiative, aiming to convert 5 million square feet of office space across 30 buildings by 2030.

However, these efforts have yet to yield significant results. So far, only one major project—the 124-unit conversion of the Humboldt Bank Building at 785 Market Street—is currently underway. Other planned conversions, like the Warfield Building at 988 Market Street, failed to secure financing and were abandoned.

The latest legislation, introduced by Mayor Daniel Lurie and Supervisor Matt Dorsey, offers the strongest incentives yet, removing fees that add up to $70,000 per unit in costs. It also establishes a “Downtown Revitalization and Economic Recovery Financing District,” allowing developers to borrow against future tax revenue to fund conversions.

“These are the three levers that we believe you have to pull to get into feasibility territory,” said Marc Babsin, president of local developer Emerald Fund, which has assessed 15 downtown office buildings for conversion.

A Shift in Downtown Real Estate Strategy

The push for office conversions aligns with the broader challenge of repurposing San Francisco’s 51 million square feet of vacant office space. With office vacancy rates exceeding 23%, the highest in the nation, city officials and real estate professionals agree that demand for office space is unlikely to return to pre-pandemic levels.

“Demand for commercial space is not coming back in downtown San Francisco, it hasn’t come back since the pandemic,” said Louis Mirante of the Bay Area Council, during a recent discussion at the Board of Supervisors’ Land Use and Transportation Committee.

The Future of Adaptive Reuse in San Francisco

As San Francisco searches for long-term solutions, conversions are gaining momentum beyond residential projects. According to Gensler’s 2025 Design Forecast, adaptive reuse will extend to retail-to-healthcare, office-to-life sciences labs, office-to-senior living, and even retail-to-sports facilities. The firm has even developed an algorithm to identify buildings best suited for conversion based on factors like walkability, transit access, floor plans, and parking availability.

Mayor Lurie, who took office this year with a pro-business agenda, believes the latest changes mark a turning point.

“Even projects that had been previously approved have been unable to start construction due to high fees and prohibitive development costs, leaving communities with empty buildings,” Lurie’s office said in a press release. “These new measures signal a new era of cooperation at City Hall.”

As AI-driven leasing activity and startup growth fuel optimism for San Francisco’s commercial real estate market, real estate leaders recognize that office-to-residential conversions will be a critical part of the city’s future. While challenges remain, these policy changes provide a necessary framework to redefine downtown San Francisco for a post-pandemic economy.