'I don't think these cities have five to 10 years,' says one of downtown Pittsburgh's largest commercial-property owners
American cities eager to turn their once-bustling office buildings into badly needed housing are pitching ambitious redevelopment plans, and have looked to real-estate developers for solutions.
But property owners say time is running out as the industry's finances grow more dire, and claim the federal government needs to remove funding obstacles preventing conversion projects from coming to fruition.
San Francisco, facing a budget deficit that could hit $1.4 billion by 2027, wants to turn its reeling downtown district into a place people would want to work, learn and live.
Mayor London Breed said Thursday that she wants to bring 30,000 new residents and students to San Francisco's downtown by 2030, turning it into a vibrant home for roughly the equivalent of 4% of the city's current population.
"On housing, we are changing our reputation as a city of 'no' to a city of 'yes,"' Breed said Thursday during the mayor's annual State of the City Address.
Breed's plan centers on cutting red tape at the city level and finding other ways to help developers convert a growing stock of obsolete downtown office buildings into more housing.
"Any piece of anti-housing legislation that comes across my desk, I will veto," Breed said.
Yet the city and others like it facing a glut of empty offices, ugly budget shortfalls and a lack of housing in their urban cores also need the Biden administration to do its part, according to Aaron Stauber, president of Rugby Realty Co., one of downtown Pittsburgh's largest commercial-property owners.
"I've been doing this for 35 years," Stauber told MarketWatch on Friday. "Typically, if you have enough time, you can work with whatever the economic situation is. Over time, private developers will figure it out."
But Stauber, who also owns buildings in Cleveland, Newark, N.J., and other markets, now thinks the luxury of time isn't available in the wake of the pandemic.
"I don't think these cities have five to 10 years," he said.
No 'urgency' from D.C.
The White House in October opened up some $35 billion in federal funding to developers seeking to turn offices into homes, with the aim of fast-tracking projects near transit centers.
Stauber was initially energized by the news - until he kicked off the application process and hit roadblocks. Instead of finding a badly needed spigot of funding for shovel-ready projects, with favorable rates and terms, Stauber was informed of various hurdles, hefty project fees and approval delays lasting 18 months to two years.
Stauber wrote a letter to the President Joe Biden and Transportation Secretary Pete Buttigieg in January, proposing tweaks to the program to bring it more line with requirements of commercial lenders - but says he has yet to hear back from the White House or the Department of Transportation. Bloomberg News also recently wrote about the challenges that he and other developers have been facing with the program.
"I would work with the existing program," Stauber told MarketWatch, adding that making only a few changes to it would benefit other cities looking to revitalize their downtowns. "Nothing we are talking about is a government giveaway," he said. "I don't know why they don't have the sense of urgency."
The White House did not immediately respond to a request for comment.
A starting point
San Francisco has struggled, even before the pandemic, to gain traction on new housing projects, with the San Francisco Chronicle reporting that another initiative to build 8,800 new housing units in the downtown area around the Salesforce Tower has remained frozen due to high costs and low tenant demand.
Breed on Thursday touted an office-to-housing conversion project at the historic Warfield Building on Market Street as a sign of progress in transforming the city's core for the future.
Local developer Group I has been working with the city to turn part of the roughly 50,000-square-foot Warfield Building into 35 new homes. Group I did not respond to a request for comment.
In addition to more housing, Breed's office wants to encourage universities and colleges to lay roots in San Francisco's Financial District, giving a round-the-clock feel to a place that office workers and many local residents avoid on weekends and abandon most weeknights.
Other cities also have taken steps to spur office-building conversions, especially those geared toward more affordable housing.
"Boston, Chicago and Washington, D.C., are further along in their affordable-housing plans, with programs that provide property-tax abatements," Moody's analysts wrote in a March 5 report on the potential of office-to-housing projects.
"Meanwhile, Pittsburgh has a program that can finance 40% of conversion costs for projects in its central business district that include affordable units," the report said, adding that Dallas, Houston and New York also are evaluating conversion tax incentives and ways to facilitate rezoning.
Distress deepens
Values for distressed office buildings have dropped an estimated 34.7% nationally - including 25.1% in Manhattan and 72.5% in San Francisco - when looking at roughly $6.5 billion in outstanding defaulted loans in commercial mortgage-bond deals, according to Moody's.
Pittsburgh's downtown, like those of other major cities, has been caught in a downward spiral by climbing office vacancies, which have neared 20% nationally as hybrid work has continued its momentum in the wake of the pandemic.
The city's controller recently warned that Pittsburgh was headed for a financial crisis, in part from falling assessments on its downtown office buildings.
Pittsburgh-based developer Stauber said he may need to mothball plans to convert the 44-story former Gulf Oil headquarters in Pittsburgh to around 200 residential units - roughly 10% of which would be affordable - plus a luxury hotel, barring assistance from the federal government.
He pegged the value of the project at about $200 million, on a property that last had a tax assessment of roughly $17 million.
"We are ready to go," Stauber said. But without more help, he may need to let leases expire at building, board it up and turn the lights off.
"And we don't want that," he said. "That will be the legacy of Pittsburgh."
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