San Francisco Office-to-Housing Conversions Gain Ground as Values Fall

A pipeline that finally exists

For most of the post-pandemic period, San Francisco's plan to turn offices into housing produced more announcements than buildings. That began to change this summer. Three major conversion proposals entered the city's development pipeline at roughly the same time: 901 Market St., 2300 Stockton St. and 150 Hayes St., which together total about 300 units.12 Axios, summarizing Chronicle reporting, called the cluster the clearest evidence so far that years of zoning changes, tax incentives and faster approvals are making deals work that developers had long said would not pencil.12

The projects differ in size and sponsor. At 150 Hayes, Emerald Fund and SDG filed plans to turn a vacant six-story Civic Center office building from 1968 into 104 apartments, add a seventh floor and replace the facade.11 Hudson Pacific Properties has applied to convert the upper floors of 901 Market into 136 units and keep the ground-floor retail.18 Ocean Avenue Real Estate Fund is proposing 70 units at 2300 Stockton.11 Smaller filings have followed, including a 12-unit partial conversion at 575 Sutter St. under the city's Downtown Adaptive Reuse program17 and early concepts for 11 to 15 units at a union-owned building at 2310 Mason St.20

The scale should not be overstated. San Francisco still has not finished a single office-to-housing conversion under its current push, while New York, Washington and Chicago have thousands of converted units underway or completed.19 What has changed is that there is now a real pipeline to track.

The vacancy paradox: recovery at the top, obsolescence below

The timing looks odd at first. Conversions are speeding up just as the office market recovers. CBRE put second-quarter vacancy at about 29.7%, down five points in a year. That was the biggest year-over-year improvement of any major U.S. market, and AI companies drove most of it.2 Cushman & Wakefield's figure was 30.1%, its lowest since late 2023, with tenant demand at its highest since 2019.3 Kidder Mathews reported a lower total vacancy rate of 27.2%, down from a peak of about 32% in 2024.1 CommercialCafe put the August average at nearly 26%.4

The firms measure vacancy differently, but they agree on direction and on scale: the city remains one of the emptiest office markets in the country even as it improves fastest.

The averages also hide a split market, and that split explains the conversion wave. Cushman & Wakefield found direct vacancy of just 8.2% in top-tier Class A buildings, which rent at a 37% premium over the broader downtown market.3 By neighborhood, Mission Bay/China Basin sat at 10.4% vacancy in Kidder Mathews' data, while Yerba Buena was at 56.4%, Mid-Market at 35% and SOMA at 33.2%.1 CBRE described the same pattern last year. Fast-growing AI firms want high-quality space they can move into almost immediately, which left commodity Class A and older Class B and C buildings far emptier than trophy towers.8

Our reading is that the AI recovery is helping conversions, not undercutting them. It clarifies which buildings will never fill with office tenants again. The developers of 150 Hayes say the building can no longer work as offices because tenants don't want it and renovating it would cost the owner too much.11 They also said Class A towers in the Financial District and along the waterfront were either too expensive to buy or still had tenants.11 As demand concentrates at the top, the city's oldest stock is left without office buyers, and its value falls until housing becomes the best use.

Cheap bases and expiring loans

That fall in value is the financial core of the story. Sylvan said a low enough purchase price is what lets a new buyer step in.11 Per-unit numbers explain why this matters. Sylvan told the Chronicle that a well-bought building like 150 Hayes can deliver apartments for $500,000 to $600,000 per unit, compared with roughly $1 million per unit for new construction.12 Recent sales show the discount. Ocean Avenue Realty Fund paid $18.25 million, about $397 per square foot, for 2300–2340 Stockton St. from the Academy of Art University.1 Meanwhile, buyers paid more than $800 per square foot for well-located office property elsewhere in the city that quarter.1

Commercial real estate debt is speeding up the repricing. San Francisco has about $12.6 billion in office loans maturing, and more than half were originated before 2021, when values and rates looked very different.4 The fallout is visible across downtown. Shorenstein and Blackstone handed 45 Fremont St. to Madison Capital through a deed in lieu of foreclosure after they could not service a $347 million loan. Madison had bought the distressed debt for $238 million. Brookfield gave up its mostly vacant 5M tower the same way this year.9 Propmodo noted that buildings like 600 California St., which traded at a steep discount after receivership, are drawing attention because low prices shrink the funding gap that killed earlier conversion plans.22

Not every distressed tower is a conversion candidate. Deep floor plates, seismic retrofits and plumbing are still major obstacles. A 107-unit plan at 420 Montgomery St. reportedly died because those upgrades cost too much.22 Still, more debt maturing means more owners and lenders will have to accept prices at which conversions work, and more buildings will come up for sale.

A REIT steps in, and the city adds a subsidy

The presence of a public real estate investment trust is notable. Hudson Pacific Properties, a REIT that owns about 12.5 million square feet of West Coast offices and studios, is the sponsor at 901 Market, a 114-year-old landmark.19 The company also landed the city's biggest lease in nearly a decade, after San Francisco took about 505,000 square feet at 1455 Market St.12 So the same landlord is benefiting from the office recovery at one property and converting another. That is how a split market looks from the owner's side.

Hudson Pacific's senior vice president, Chris Pearson, said the city's new tax break gives developers a way to assemble financing packages that make conversions work.19 Propmodo had called 901 Market a test of whether the incentives can bring large institutional owners off the sidelines.16 Coverage of the plan has also changed over time. An earlier description put the building at around 206 units,16 but the filed application lists 136.18 That smaller number may reflect the design limits that come up whenever deep commercial floors are turned into apartments.

The main incentive is the Downtown Revitalization Financing District, which Mayor Daniel Lurie signed in February. Enrolled projects can receive annual payments for up to 30 years, funded by the property tax growth their conversions create. Officials estimate about 50 buildings could qualify and produce about 4,400 homes, with enrollment open until 2032.14 The district adds to a February 2025 ordinance that waived impact fees,14 which developers had estimated added about $70,000 per unit,26 and to an earlier exemption from the real estate transfer tax.24 Three developers have applied to the district so far.19

Where the coverage diverges, and what to watch

Coverage disagrees most on the state of the Humboldt Bank Building at 785 Market St., which was once held up as the model post-pandemic conversion. In March, Propmodo called it the only major conversion under construction.16 CoStar described the project as stalled despite a groundbreaking in 2024.27 The San Francisco Standard reported it was abandoned last year after the developer could not secure enough financing.11 The Standard's account is the most recent and the most definitive, and we treat it as the best guide. The episode is a reminder that a filed application, or even a groundbreaking, does not mean a project will be built.

There are smaller differences too. The New York Times, as republished by The Business Times, put 150 Hayes at 106 apartments,19 while local filings show 104.11 More important is how the incentives are framed. Supporters cite New York's tax abatement, which officials credit with more than 12,000 converted units in lower Manhattan.14 Skeptics point out that San Francisco's office stock is about one-eighth the size of New York's and sits in a seismic zone.11 Housing also faces wider headwinds: more than 20,000 approved units remain unbuilt because of construction costs, interest rates and tariff uncertainty.13

On the evidence so far, we expect San Francisco conversions to stay a specialist niche for years. Projects will come from small developers and opportunistic owners picking off obsolete, cheaply bought buildings, not from a broad remaking of downtown. Sylvan himself said the opportunities are scattered enough that bigger players would struggle to justify the effort.11 Still, a basis reset forced by debt, a subsidy funded by future taxes and an office market sorting winners from losers are the strongest set of conditions the city has had. The real test is whether any of these projects finishes construction and gets leased, so that lenders and investors outside the current small group start to believe conversions can work.