What a difference a year makes. The reclassification of dot-coms from "business service" to office use, combined with the economic downturn affecting the Bay Area, has had a huge impact on commercial space in San Francisco. Hundreds of thousands of square feet previously classified as 'business service" by the Planning Department, in part to avoid the Prop. M office caps, now lay vacant because there are few, if any, dot-coms to occupy space, and only a limited number of other types of "business service" users willing and/or able to do so. Whereas before space was the focus of bidding wars between dot-coms looking for a home in the City, now a large amount of space is the focus of "matching" wars between landlords looking to have their space occupied by any available tenant. Thousands, if not millions, of square feet of prime office space planned and entitled in the midst of the dot-com craze, will shortly become available, in a time of substantially reduced rents, over 20% vacancy rates, and a glut of unoccupied similar space.
However, not all is lost for the San Francisco real estate market. Clearly, this is an excellent time for tenants. Other opportunities exist by moving to other markets, such as shifting from commercial office to residential development. For years, the City has experienced a huge shortage of housing, particularly affordable housing, in all areas of the City.
Developers contemplating the residential market should be aware, though, that developing housing in San Francisco might be tougher in the future due to inconsistencies created by pending legislation. Recent legislation proposed in areas such as the Mission District and Showplace Square/Potrero Hill, for example, imposes stringent restrictions on housing in those areas. Moreover, pending legislation to increase the affordability requirement to a level considered by many to be unachievable, may further discourage residential developers from breaking ground. At the same time, there is legislation proposed for the Third Street corridor which aims to promote residential uses by rezoning properties from industrial to neighborhood commercial.
Other opportunities may exist in the biotech area. A number of UCSF and other biotech/life science buildings are proceeding in the Mission Bay area. Biotech is a fast-growing sector of the economy in the Bay Area, and many biotech firms are hoping to find a home in San Francisco. Retail, particularly discount or big box retail which flourish in a "down" economy due to increased availability of scarce sites and dropping land costs, also present opportunities, despite rejection of such uses during recent "high" economic times.
Unfortunately, the Board of Supervisors has placed hurdles before developers shifting their focus to new facets of the market. Recent legislation introduced by certain Supervisors prohibits new research laboratories, a main function of biotech users, throughout various parts in the City. The legislation also prohibits many other uses (such as office) in certain areas. Another new piece of legislation essentially prohibits big-box development throughout most of the City for at least one year.
Such moves by the Board of Supervisors have left many developers asking just what can be built in San Francisco. Right now, that is a tough question to answer. Hopefully our Supervisors will recognize the benefits to the City of encouraging available opportunities, before more developers leave the City for more "development-friendly" places such as Oakland, just a bridge away.