Does new S.F. skyscraper proposal signal a timeline for the city's comeback?

San Francisco Chronicle​

2 days ago

San Francisco was challenged.
The city's weakened economy, still recovering from financial catastrophe and political uncertainty, was at a crossroads when developer Hines pitched what would be the city's tallest building.
The year was 2012.
Thirteen years later, the same company is looking to do it again, with a new skyscraper proposal on Friday at the former PG&E headquarters that would be even taller than Salesforce Tower.
But times are so different than they were in 2012. San Francisco is now beset by an even deeper office market slump than the wake of the 2008 Great Recession. Pandemic-fueled remote work habits pushed the vacancy rate above 30%. And the city budget faces a record-high deficit that could reach $1 billion, with declines in property taxes and the threat of federal aid being choked off by President Donald Trump
Hines is betting that the second half of the 2020s will echo the late 2010s tech boom, with office demand overcoming the post-COVID hangover.
But there are many hurdles and a long path ahead: Hines' new proposal, if it moves forward, will require years of approval, financing and construction. Hines already paid PG&E $800 million for the property and construction costs of other supertall buildings have topped $1 billion. Salesforce Tower took about a decade to conceive and complete.
And forecasts for when the city's core will reach a pre-pandemic sense of normalcy have been varied and without consensus. Stanford professor and remote work expert Nicholas Bloom last fall said San Francisco's recovery was five years away. Months earlier a report from real estate firm Avison Young suggested San Francisco won't fully recover until 2042.
Real estate experts have said this year that the comeback has started, thanks to the surge in artificial intelligence companies leasing swaths of office space and the vacancy rate falling in the second quarter.
But downtown will need more to recapture the heady days of 2018, when tech giants gobbled up almost every vacant listing, they said.
'First and foremost, San Francisco is notorious for being a boom and bust market and 2030 could look very different than today — especially if we can create a more mixed-use environment downtown,' said Robert Sammons, senior research director at real estate brokerage Cushman & Wakefield.
Making downtown more attractive could mean more housing — Hines' plan calls for 120 new homes in what's now an office building at 25 Beale St. — as well as more events, restaurants and reasons to come outside the workday. City efforts like making Front Street an outdoor-drinking 'entertainment zone' and hosting parties on the Embarcadero are helping draw thousands to downtown and boosting bars and restaurants.
Still, completing a skyscraper of any size has eluded almost every developer since the pandemic. The 395-foot 415 Natoma St., the city's tallest building completed since the pandemic, is 97% vacant. (The Brookfield-owned building is part of the 5M project and Brookfield's partner is Chronicle owner Hearst.) Some new office and residential buildings at Mission Rock have filled up, in one of the city's post-pandemic success stories.
Hines' own Parcel F project has been stalled for years since its approval, after Salesforce cancelled a lease in 2021. And nearby Oceanwide Center, which began construction in 2017 with approval to be San Francisco's second-tallest tower, is frozen after its Chinese developer collapsed.
One of Hines' best assets is location, real estate experts said. The PG&E site is on one of the only development sites on Market Street, adjacent to BART and a few blocks from the waterfront.
'You could call this arguably the best office development site in the city. It's just a fantastic location,' said Derek Daniels, Bay Area research director at real estate brokerage Colliers.
And while the citywide office vacancy rate is around 30%, Daniels notes that the category of the highest-quality highrise space with great views has a rate that's under 10%. Rents in premium towers, like the Transamerica Pyramid, can exceed $200 per square foot annually, some of the highest rents in the country.
It remains to be seen what form the proposed Hines tower will take, without a design firm attached to the project. But it will likely be built for top quality, or Class A, office space, similar to nearby Salesforce Tower and 181 Fremont.
'We are definitely seeing an interest for those (great) view, high-quality assets,' said Alexander Quinn, Northern California senior director of research at brokerage JLL. 'There is more scarcity.'
In contrast, South of Market condo prices remain below 2020 levels, according to residential brokerage Compass. An earlier, shorter tower plan by Hines at the same PG&E site had called for more housing, but the current plan is primarily office, with a massive 1.6 million square feet that would be 200,000 square feet more than Salesforce Tower.
Though the office market still has plenty of struggles, Daniels believes that vacancy has already peaked and the city is on the path to recovery. Colliers tracked 3.2 million square feet of new and renewed leases in the second quarter, the highest level in the city since mid-2019, he said. Notably, the crypto company Coinbase leased 150,000 square feet at Mission Rock, a reversal of its exit from San Francisco during the pandemic.
Mayor Daniel Lurie was eager to highlight Hines' tower project. In an Instagram video, he stood in front of the former PG&E site. 'This is going to be a neighborhood that has got live, work and play opportunities,' he said. 'It is a signal to the world that San Francisco is on the rise.'