Uber attempting to reduce office space in SF / 31% of office leases open
sfchronicle.com
sfchronicle.com
- Tech companies are moving to remote/hybrid work (whether by choice or not) and don't need the office space.
- Tech companies rode the bubble and made wild headcount projections between 2018-2021 and leased space accordingly. Now after the freezes and layoffs the exponential growth stopped and they realized they don't need as much of it anymore.
So while covid/remote work is partially to blame, it doesn't tell the full story. Companies in Uber's cohort have just never been sustainable at all. Now that VC money (including tens of billions from Softbank/Saudi Investment Fund) has stopped flowing in and the market demands actual profit, they are having to face reality and cut spending wherever they can.
I love the corporate bullshit speak. The people who report “higher satisfaction” working in an office should go and do that instead of forcing their views on everyone else. Some of us have lives and don’t require forced socialization or a crowded open office to feel a sense of belonging.
Here's their financial report plus an AI to chat with https://docalysis.com/files/5472910746
Leasing office space, paying employees and doing this in each city costs real money, and you need this infrastructure to keep your pipeline of active drivers filled.
My question is: is it possible to design high rise buildings in the future that can flex between residential and commercial? What's the extra upfront cost in plumbing, etc to build in this optionality from the start?
But it could certainly be designed to be easier to convert, as the older one was easier. The problem you may run into is that the people who want office buildings won't want the easily convertible building; so you might have to legislate that it be convertible.
https://www.nytimes.com/interactive/2023/03/11/upshot/office...
HN needs some AI to just autofill "asked and answered N times already - see here:..."
If you required all new office buildings to have the same small floorplate size of a residential building, then they would be convertible, but thay would significantly change the economics of commercial real estate.
Like a bunch of tiny homes inside an open plan office.
If you want even more light and air, design office towers to have some extra "wasted" central space, beyond just that needed for an elevator shaft and plumbing — i.e. make them into squared-off toruses. Then, post-facade-stripping, it won't be dark in the middle, either.
Or just build office towers that are long and narrow, rather than square, such that if you convert them into residential, you get functional "commie block" architecture where every unit gets not only a window, but a balcony.
I keep wondering where do the office requirements come from, but I know I won't like the answer.
* round the outside, round the outside
For the latter, many of these buildings do punch holes for restaurants closer to the ground floor.
The part we don't talk about in zoning and missing middle conversations is that the US eliminated the lowest income housing, which was temporary, single occupancy, with shared resources ie the Saloon, brothel, short term rent, and multi-tenant housing in the 70s.
"Punch holes" means actually removing building mass, not just adding windows. The floor plans on office buildings are so massive that you literally need to punch holes into every floor to bring windows inwards for apartments. This is a good example: https://twitter.com/SustainableTall/status/16572851981518315...
If you divided each floor into 10 2,600 square foot ultra high end condos, the pre-improvement base cost would be $980,000 per unit. You could then turn around and sell them for probably at least $3-4M. Assuming buildout/sales costs of $1M per unit, you could conceivably clear $1M-2M in profit.
You're quite right about how the discourse goes, but let me suggest that just as the office space targets and economics are now badly out of date, so are the default assumptions about how space can and should be used. Bureaucrats by nature are incapable of creativity, and their inability to solve the problem means their opinions should be heavily discounted. This isn't to say they have no role to play; after some new solutions emerge, they can look at the ups and downs and codify some new standards. But in a problem situation, they are just in the way.
I wonder at what point it will be cheaper to lease out an entire floor of a corporate office and throw an air matress in it then to rent a 3 bedroom house.
> About 31% of downtown San Francisco’s office space is now available for lease or sublease. In early 2020, the vacancy rate was around 4%
Demand is gone
(And a coworker was telling me it's the same thing in Phoenix which barely has a transit system.)
But the parent is being a bit hyperbolic. There is still a mostly functioning subway system. You can check the mbta.com website. As I look now there are delays but probably nothing too awful for someone in the city for a few days.
I'd really prefer to avoid a ride share or rental car.
Edit - it appears that it's less than a 10 minute walk from Govt Center (blue) to Park St (red). That's better than waiting for a train and taking for a single stop, right?
https://www.google.com/maps/dir/Revere+Beach,+Revere,+MA+021...
* I wonder if there's a German word for this feeling?
All the laid off people still commute to an empty office and stand outside hoping for a job.
There's an old office building near where my parents live that got converted to residential units. The contractor who did the conversion said it would have been cheaper to tear the building down and rebuild, but the owner felt there was some historic value to the building. Either way, the only way to make the transition feasible was to price the units at a luxury level.
Mind you, this isn't even California, but the Midwest, where zoning, regulations and construction costs are more sane. I don't know how viable the same project would have been out there.
Even before my time, conversions were enormously profitable. In NYC, long ago, converting warehouses and factory spaces to luxury lofts was enormous business. I don't think people should dismiss the amount of money to be made on conversions. The main drawback is that the areas the conversions are in become even less affordable. Which may be more than offset by affordability increases elsewhere in the city.
Maybe not a warehouse, but a factory is a very different conversion than a gigantic open-floor office--especially if the building is old enough that it existed prior to electricity.
Take these new buildings for example:
SF Offices:
- Salesforce Tower: 1.4mn square feet over 61 floors (23k sqft/floor)
- 250 Howard: 734k sqft over 43 floors (17k sqft/floor)
- 350 Mission: 455 sqft over 30 floors (15k sqft/floor)
Office Elsewhere:
- 10 Hudson Yards (NYC): 1.8mn sqft over 52 floors (35k sqft/floor)
- BMO Tower (Chicago) - 1.5mn sqft over 51 floors (29k sqft/floor)
- Block 158 (Austin) - 720k sqft over 35 floors (20k sqft/floor with bottom floors c.3x larger than top floors)
Newly built large residential buildings in SF were usually 15-20k sqft/floor (e.g., The Avery), so there are actually very few buildings here that don't work for residential.
All that is a significant investment in a city with very high labor prices (because most skilled trade types got priced out), so it might not be economical to do such a redesign at the moment.
I agree with your logic when CRE yields 1.5x the rent of residential, but the model needs to be updated now that it's no longer the case.
Is your base cases these offices sit empty forever? Get torn down?
I think that line of thinking is the one massively ignorant of the realities of real estate.
In a city with almost no residential rental vacancies? That's the end-game?
EDIT: For everyone direct-quoting:
The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development.
A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion.
$500 is nowhere near the fully-loaded cost to build new in any US city. The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield.
It is just a simple fallacy to believe that SF/NYC offices can command $75/sqft at any reasonable occupancy level.
The economics of conversions only don't work when offices command premium rents, it's not some axiomatic fact about the world (the way it was before the pandemic).
Yes I agree with you, but who pays for it? JLL and CBRE are large and diversified enough that they can eat the cost of their SF commercial properties being vacant.
It doesn't make sense for them to spend funds on retrofitting their properties into apartments when they can regeotiate their mortgage commitment to be much more amenable in the short term, especially when similar residential properties in SF like NEMA, The Gateway, and others continue to have elevated vacancy rates.
You can't force private businesses to do residential retrofits - they'll only do it if there is a viable financial case for them to do it.
Most luxury residential property in SF is owned and managed by Greystar, Avalon, and UDR. These are different companies from JLL and CBRE who own the vacant office buildings. At that point, who pays for the retrofit - JLL+CBRE or the residential landlords line Greystar+Avalon+UDR? It doesn't make sense to either because they are large, diversified international companies that have better opportunities to deploy the capital they have at hand (eg. NoMA in DC, NYC, etc). Why spend $1-2 billion renovating+retrofitting when you can spend the same amount with a better RoI in other markets.
To your capital allocation point, you're lucky to get $40/sqft/year in DC.
This is real money you're talking about. It's not some pie in the sky idea that a residential building in SF is profitable.
The line of argument that conversion can't be done is just repeating things that were true before the pandemic and that commercial lenders/developers hope will be true again.
If buildings default, all the commercial owners/lenders eat the capital loss (hence their current loud and public press tour about why conversions are not feasible), a new buyer buys at a lower cost basis and then converts. Why is that extremely practical outcome so outlandish?
SF office buildings are already trading at 75% 2019 prices. If you (as the new low cost basis buyer) can yield even 25% more by residential converting why wouldn't you?
To run new 240v to each apartment, plus water, plus septic, plus whatever additional load bearing requirements there are means you're effectively gutting the building anyway. Then, on top of that, you have to deal with light, fire escapes, etc. which may not be easy to do with the existing building's footprint.
I think your contractor is just way off base.
Maybe they're correct for 1-3 story office parks, but there aren't really many of those in SF.
[0]https://en.wikipedia.org/wiki/List_of_tallest_voluntarily_de...
Of course, that also means there is plenty of money to pay for a teardown. But being torn between making a killing tearing down and rebuilding vs making a killing doing a conversion is a good problem to have.
People always say this and it is true when CRE yields 1.5x the rent of residential, but we are no longer in that world.
The real thing that people underestimate is that now the alternative is building new residential, which is always more expensive than converting.
I think a lot of people, for whatever reason, have seen the entire world change due to COVID, but are just unwilling to believe anything has changed about office conversions.
The conversion alone might cost about $400 or $500 per usable square foot, Mr. Bernstein added, and would in many cases be more expensive than building a new development.
A recent Moody’s analysis of New York offices found that just 3 percent of the buildings it tracked would be viable for apartment conversions. The median rent for apartments in New York is $55 per square foot, which just 36 percent of office properties now fall at or below — and on top of that, there’s all the cost of conversion.
$500 is nowhere near the fully-loaded cost to build new in any US city. The quoted man is comparing the cost to the delta in rent to his out-of-date understanding of what offices can yield.
It is just a simple fallacy to believe that SF/NYC offices can command $75/sqft at any reasonable occupancy level going forward.
The economics of conversions only don't work when offices command premium rents, it's not some axiomatic fact about the world (the way it was before the pandemic).
Immediately the safety codes for ventilation no longer matter, immediately the plumbing is satisfactory.
You could even have walls made of cubicle panels.
Is this going to be the equivalent of a studio apartment, no, but it should cost a lot less.
There is no demand in SF. The whole commercial real estate sector is in a downward doomsday spiral, something that was easily predictable and preventable, but the city didn’t care.
30% of office space is vacant (not rented), a number that will only go up because the other 70% may be rented, but a lot of it isn’t actively utilized.
https://www.nbcbayarea.com/news/local/san-francisco-office-v...
In fact a lot of commercial real estate owners are realizing this and trying to minimize losses. Some selling entire buildings at 75% discounts.
https://www.sfchronicle.com/sf/article/this-downtown-s-f-bui...
Anyone still holding a real estate lease at the ridiculous historical prices right now is only going to try and shed them even if they actually are using the space.
1) SF actually has a hard cap on the amount of new office space it can develop in a given year. [0] A lot of people pre-pandemic called it one of the worst NIMBY laws in America, but in retrospect, what a smart policy move.
2) Depending on how much you believe Apartments.com, there are c. 5k apartments available for rent in SF proper (a city of 800k) vs. c.31k in Dallas proper (a city of 1.3mn).
3) SF currently has 35mn square feet of vacant office space and needs to (by law) build 80k units in the coming decades. That's about 500sqft of vacant space per necessary unit...
It will be interesting to see if SF can transform itself into the world's foremost 'people live here because they want to, the jobs are virtual' city. I certainly wouldn't bet on other cities slightly lower office vacancy rates as a long-term structural advantage.
The only problem I see with the above is the amount of doom-and-gloom SF residents have bought into.
[0]https://sfplanning.org/office-development-annual-limitation-...
Look on LoopNet and the 1.5k sq.ft. section is still competitive with before. Unless someone here knows where I can find that size with high-speed internet, good power, and temperature control close to BART.
call centers, tax prep sweatshops, data entry, cold-call sales
i.e. people who can't just say "no" to RTO orders
SF government will brag about low vacancy rates, but the towers will be filled with minimum wage workers