After success with electric cars and rocket ships, Elon Musk has turned his attention to a more challenging problem: creating new bedrooms in San Francisco.
According to reporting in Forbes, employees returning to Twitter HQ last week discovered “modest bedrooms featuring unmade mattresses, drab curtains and giant conference-room telepresence monitors … one room even has a plant.” It’s a natural fit for a company where Musk has simultaneously fired thousands of workers and braced those that remain for “extremely hardcore” work.
If only it were so easy! The next day, San Francisco building inspectors launched an investigation into the company. Three hours later, Musk responded by sharing a story of a baby who had reportedly accidentally overdosed on fentanyl in a local playground. “Where are your priorities,” he asked, tagging Mayor London Breed.
Musk’s view of work-life balance may be extreme, but his problems are emblematic of a more general trend: The heralded conversion of half-empty downtown office space into much-needed housing has not materialized. At all. According to a report published by CBRE last month, there have been only 42 completed office conversions in the entire country this year, one fewer than last year’s 43 and on par with the 2019 figure.
For big cities, this kind of adaptive reuse was supposed to be the great silver lining of the work-from-home disaster that gutted central business districts during the pandemic. As Alex Armlovich wrote of New York City earlier this year, “Imagine for a moment that we went back in time to 2019 and told the city’s leaders—beset with housing scarcity, a crowded transit system and extreme traffic congestion—that we would soon have technology that allows staggered hours and remote work to shrink rush hour travel by, say, 20%. Such a technology would have been welcomed with open arms.”
Instead, office space is empty and getting emptier. The overall office vacancy rate is above 20 percent in Atlanta, Chicago, Columbus, Dallas, Denver, Houston, Los Angeles, San Francisco, Minneapolis, and in all four New York City business districts (Brooklyn, Downtown, Midtown, Midtown South). Nationally, office space is about as empty as it was after the 2010 recession … but we’re on the verge of a recession, not at the end of one.
And those numbers cover just leases, a lagging indicator. According to the office security company Kastle—the “Covid-Era Kings of Back-to-Work Data”—the country’s 10 largest office markets are 53 percent vacant based on employee badge scans. As long-term office leases start to turn over, those two “vacancy” measures are going to get closer. Stijn Van Nieuwerburgh, a professor at Columbia Business School and a co-author of a recent paper titled “Work From Home and the Office Real Estate Apocalypse,” called the situation “dire.” The paper estimates that at the outset of the pandemic, the value of New York City office stock fell 44 percent, which will have serious consequences for the city’s tax base as that figure makes its way into adjustments.
Housing remains extremely expensive in spite of it all, even in many of the same places that have seen office space empty out. But adaptive reuse, which would turn unwanted offices into homes, isn’t following. According to the CBRE report, even all the planned office conversions through 2025, along with those completed since 2016, would amount to only 2 percent of U.S. office space. And that includes offices that have become hotels or life-science labs.
What’s going on? One problem is simply with the shape of office buildings: Their deep floor plates mean it’s hard for natural light to reach most of the space once it’s divided up into rooms. Their utilities are centralized, which requires extensive work to bring plumbing and HVAC into new apartments. Either way, they require significant architectural intervention. The older stock of prewar offices, which are better suited for residential units, have often already been converted in cities like Chicago and Philadelphia. Another issue is with zoning codes that bar housing from office districts. A third obstacle is the building code: Early residential conversions, like those in SoHo’s lofts, were usually illegal, sometimes for complicated reasons that seem less important than mandating a window in every bedroom.
What’s more, business districts don’t empty out building by building but with vacancies here and there across the skyline. You wouldn’t convert Twitter’s building, since it’s partially occupied by workers. So, in one sense, Musk’s bed stunt is an example of his already innovating at Twitter. Very mixed-use! “You’re not going to run into a building that’s 100 percent empty, ready to be converted,” said Anjali Kolachalam, a researcher with Up for Growth. She recently ran office space in downtown Denver through a filter to find good conversion targets—tall buildings with high vacancy rates and small floor plates built before 2010. She wound up with just 4 office buildings, out of the 208 total.
Finally, converting buildings to residential use is expensive. Couple that with the fact that office rents are higher per square foot than residential rents are, and you see why developers aren’t champing at the bit to get new projects underway. Van Nieuwerburgh gave me an example from San Francisco, where Juul’s old headquarters—down the block from Twitter’s improvised dormitory—is for sale for $150 million. That’s a lot less than the $397 million the embattled nicotine vape company paid for it in 2019. But at $400 a square foot to buy and another $400 a square foot to renovate, he said, the conversion would still produce a building with rents too high even for San Francisco. In other words, offices may be down, but they’ll have to fall a lot further before adaptive reuse becomes a bargain.
There’s a cost to waiting for offices to empty out and rents to sink: dreary, abandoned downtowns that are conducive to crime and hostile to visitors. If we want to see more offices converted into apartments now—real apartments, not makeshift bedrooms in old conference rooms—cities will need to combine zoning changes with old-fashioned subsidy. Sen. Debbie Stabenow of Michigan has proposed a bill to create a federal tax incentive for turning offices into housing. Cities including Dallas and Baltimore have tried their own subsidy programs in the past, but pandemic-era initiatives have so far been mostly ineffective. It takes almost as much money to convert an old building to residential as it does to build a new one from scratch. No one will do it unless the price is right.