A fast-shifting economy is prompting more developers to pursue what was unthinkable during the remarkable years-long tech boom: replacing office space with homes.
Gone are ambitious and game-changing proposals for office buildings and tech campuses with enough space for several thousand workers in San Jose, other parts of Silicon Valley, and in East Bay cities such as Oakland and Berkeley.
Housing units are the new grand plan as office projects head to the back shelves. Big-box retail centers and new hotel construction have also turned unpopular.
More property owners are crafting “builder’s remedy” gambits for project proposals. Developers hope to dramatically streamline the project approval process in cities that have yet to win state certification for their long-term blueprints for future housing development.
“The builder’s remedy solution is a lot of the reason for this,” said David Taxin, a partner with Meacham Oppenheimer, a commercial real estate firm. “We are short of housing. This is why we are seeing a mad rush for conversions.”
A persistent shift to remote work amid the pandemic, along with skyrocketing office vacancy rates and feeble rents, are also fueling the shifts.
“The market is overreacting, rightly or wrongly, to a crisis,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy. “Property owners and developers are asking cities to ignore their general plans and just approve housing of any kind of density.”
In downtown San Jose, active South Bay developer Urban Catalyst had gained approval for an office tower at the corner of East Santa Clara and North Fourth streets. The convulsions in the office market, though, forced a change in plans.
“New speculative office buildings are just not viable right now,” said Erik Hayden, founder and partner with Urban Catalyst, which ditched its office proposal and instead pitched a 650-unit residential project. “If you haven’t built anything yet, it is easier to change entitlements.”
The proposals are appearing at a time when owners of existing office buildings face enormous challenges in finding tenants for their projects.
“It’s an economic necessity to look at doing a conversion,” said Nick Goddard, a senior vice president with Colliers, a commercial real estate firm. “There is high demand for housing. There is anemic demand for office and retail space.”
While an acute shortage of housing now grips the Bay Area, the surge in housing demand doesn’t automatically guarantee success for conversions of office buildings.
“A lot of people are looking at converting offices to housing, but only about 10% of these will work,” said Jeffrey Weil, an executive vice president with Colliers.
Individual floors of many office buildings are too large, and a conversion to housing would mean a big chunk of a theoretical residential unit would be too far away from the windows. In other instances, developers aim to bulldoze existing office buildings located in pockets surrounded by vast tech hubs. Plus, some retail sites are headed for the wrecking ball with housing as the replacement.
Waves of projects that replace office sites with new homes might erase numerous locations that could accommodate thousands of jobs of all kinds, particularly tech employment, which could have significant tax and revenue implications for cities.
The coronavirus outbreak prompted government agencies to impose wide-ranging business shutdowns. Yet those lockdowns also chased office people away from their offices and disrupted shopping and hotel stays. Yet even after the government halted the restrictions, the pace of the return to workplaces has proceeded at a sluggish pace as many employees stay away from their offices.
“We will see how the housing conversions work out,” said Russell Hancock, president of Joint Venture Silicon Valley, a San Jose-based think tank. “One thing is certain. Remote work is permanent. That is not a passing phenomenon.”
One housing conversion project in downtown San Jose that appears poised for success is a hotel tower slated to be converted to housing for San Jose State University students. In November, a Bay Area real estate firm paid $73.1 million as part of a landmark $113 million deal to convert the southern tower of the Signia hotel on South Market Street in San Jose to student housing. Several hundred SJSU students could live in the hotel tower, which was unoccupied at the time of the deal.
“A building that is empty will be full of life as 700 to 800 young people move in,” San Jose Mayor Matt Mahan said at the time of the property transaction. “This is an example of the new, innovative strategies we need to address our statewide housing crisis.”
A few blocks away, developers Westbank and Urban Community hope to convert the historic Bank of Italy tower on South First Street from its current office uses to a primarily residential high-rise. Featuring cozy offices that each have separate windows, the Bank of Italy appears to be a suitable candidate for conversion. The tower could accommodate 125 to 150 residences, Gary Dillabough, a developer working on the conversion, said recently.
“You have to have a fair amount of window access,” Dillabough said. “Most office buildings weren’t constructed with that in mind. Tech companies typically want big floors, which aren’t as suitable for housing.”
At the Berryessa Flea Market site, around the corner from a busy BART station in San Jose, developers at one point had proposed a huge office campus large enough to accommodate 7,500 to 11,500 workers. The city approved the proposal.
Recently, however, the property owners ditched the plans for an office hub and want San Jose to approve a project for 940 residences, including some townhomes. This is a low-density approach next to a transit hub, in Staedler’s view.
“It’s not a good idea to put townhomes next to a transit station,” Staedler said. “Down-zoning next to transit is a 200-year mistake.”
Erik Schoennauer, a representative for the property owners, the Bumb Family, said a big office complex just won’t work at this site under current conditions.
“In the case of the Flea Market, the burden of the requirement that half of the acreage be commercial office development, makes the overall project infeasible, because there has never been and likely won’t be a market for office at this location,” Schoennauer said. “If the overall project is infeasible, then there also won’t be any housing built under the approved plan.”
Other experts agree that city officials around the Bay Area should require proponents of housing conversions to seek the most units possible per acre.
“The economics for housing are good,” said Michael Van Every, president and managing partner with Republic Urban Properties, a veteran Bay Area development company. “We need to have people live in high-density development. The denser the development, you will see more trickle-down economic benefits.”