With office rents in San Francisco up 81 percent since 2010 and approaching an average of $60 per square foot, a mark only once before observed in San Francisco – during the “tech boom” of 2000, San Francisco’s Planning Department is holding proposals for over 9 million square feet of office space to be built in the city.

That’s a pipeline of “three Embarcadero Centers or 20 Transamerica Pyramids” worth of proposed development.  And that’s on top of over 12 million square feet of office space which is currently under construction in the city or has already been approved.

The problem, as reported by J.K. Dineen at the Chronicle:  Proposition M.

Approved by San Francisco voters in 1986, Proposition M established an annual cap on the amount of office space that’s allowed to be approved for development.  And while the annual allocation of 875,000 square feet can be banked in a down market, the current balance in the account which can be allocated is 1.9 million square feet, roughly one-fifth the amount of space which has been proposed.

Next month, San Francisco’s Planning Commission will to begin developing a framework by which to decide which proposals should be approved and which will be denied.  And while design has played a part in past allocations, San Francisco Planning Director John Rahaim plans to “urge the commission against basing decisions on aesthetics” and focus on more “objective” measures.

San Francisco’s cap on commercial development could soon exacerbate the sharp rise in commercial rents, drive more companies out of the city, and limit the city’s current boom.  That being said, it could also limit a bust.

“”We don’t know how long this bubble will last, but we know what happened to the last one. It tanked hard,” [said developer, John Elberling].  “There is always way too much optimism about demand when you are in a boom – everyone acts as if it will go on forever. There is always the correction.””

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Comments from “Plugged-In” Readers

  1. Posted by observant neighbor

    How absurd. Too bad our “city family” mayor hasn’t put together a ballot measure to amend Prop. M. How about allowing additional development conditional on “impact fees” to be used for subsidizing the rent of long-time commercial tenants?

  2. Posted by sassyboyfrisco

    Ridiculous OUTDATED law…it’s NOT the 80’s…let voters vote again on expansion…better yet, let SF planning commission and qualified economists set thresholds to keep rents reasonable yet fulfill supply and demand appetite!

  3. Posted by Homer and Peter

    maybe we should look at every proposition proposed prior to 1990 and vote again. We can waste millions upon millions of tax payers dollars to stage these elections and then rehash them every 25 years because the generation before must have been smoking something…

    Unfortunately, we as California’s brought this stupidity upon ourselves and now we have to deal with it. We need to start at the root of the issue, down with voter propositions. We vote for elected officials because we as voters do not have the time and energy or all the information necessary to make an informed decisions. That is why they are here, to be the voice of the people. Yet each election we get to voice our uninformed opinion on 8-10 issues that 99% of us have no business voting on. This development cap is one of the many absurd but real unintended consequences of ballot box propositions.

  4. Posted by charlesschwab

    Not only will SF have the most expensive housing in the country, it will also have the most expensive commercial rents in the country (in turn, making products and services more expensive as businesses pass the buck along).

    Congratulations SF voters, by limiting development, you are shooing yourselves in the foot and creating consequences I intended from you goals. Unless your goal all along was to make landlords and businesses filthy rich.

    • Posted by Sierrajeff

      The goal – and I’m not arguing it’s merits, just stating – was to prevent “Manhattanization” of S.F. The voters at the time did not want S.F. to become taller and denser. One can argue whether the voters of the time realized what this would do to rents (residential and office), but that at least was the stated purpose of the initiatives.

      • Posted by CrockPot

        Too late for that party. SF is already Manhattanized.

  5. Posted by JR "Bob" Dobbs

    On this one, the cap was not some unintended consequence. It was the very purpose of Prop M. It passed because the voters did not want to rapidly and dramatically change the scale and proportions of the city in which they lived and which they loved.

    Lots of strong arguments against Prop M, and lots for it. I don’t think that Prop M is going to cause SF any ruin. Nor do I think it is a panacea. Similarly, if it were repealed, I don’t think SF would be ruined nor would it only get better as a consequence. My bet is that if this were placed before the voters today, it would again pass. I’d vote against it, but I can see both sides. Anyone who is claiming this is some black and white issue is trying to sell you something.

  6. Posted by The Milkshake of Despair

    Just be sure to add a corresponding amount of residential space. Don’t exacerbate the commute crush any more than it is. Every transport channel in and out of the 7×7 is maxed out and there’s almost nothing at all in the pipeline to add capacity.

    BTW – I was just in a sector of Silicon Valley that I hadn’t visited in a few months and was surprised to see several large (8+ story) office and residential developments under construction. There’s no corresponding investment in transportation there either but at least northern SV has a fair amount of excess transit capacity.

    • Posted by Can't think of Cool Name

      And lets add adequate mass transportation to the equation as well. The article sited talks about a lot of the proposed building going up along the T extension (I refuse to call it a “central subway”). That’s great for north/south travel, but what about plans for east/west mass transit as well?

  7. Posted by SFrentier

    Prop M, that’s awesome! It’s like the equivalent of rent control for commercial. Anything to limit supply and ensure high rents in this city. Property investors paradise.

  8. Posted by Jim

    Yup. Brilliant law. You can build all the office space you want when it isn’t needed and are limited when it is needed. Totally backwards.

  9. Posted by eddy

    Meanwhile in NYC. 28 Acres of land fully developed in 6 years:

    http://www.hudsonyardsnewyork.com/
    http://en.wikipedia.org/wiki/Hudson_Yards_Redevelopment_Project

    “Hudson Yards is the largest private real estate development in the history of the United States and the largest development in New York City since Rockefeller Center. It is anticipated that more than 24 million people will visit Hudson Yards every year. The site will include more than 17 million square feet of commercial and residential space, more than 100 shops,20 restaurants, approximately 5,000 residences, a unique cultural space, 14 acres of public open space, a 750-seat public school and a 150-room luxury hotel—all offering unparalleled amenities for residents, employees and guests. The development of Hudson Yards will create more than 23,000 construction jobs.”

    I’ve long preached about how SF is going through a Manhattanization, however, there certainly is a lot of overhead here. Prop M and shady Prop 13 laws for commercial properties should be repealed. Along with the shady transfer tax avoidance laws being abused here as well.

    Not to say the Transbay Terminal Project initiative isn’t worthwhile, but there is demand and capacity for further aggressive development. There is a globalization of CENTRAL economic centers and San Francisco is screaming for help here. London, NYC, Dubai/UAE, HK are all developing as fast as they can while we plod along.

    • Posted by Sierrajeff

      eh – I’m involved in trying to build a 7-story residential building in lower Manhattan… it’s like pulling teeth. (In fact I hate working in NYC.) So no where is perfect (and there are *plenty* of critics of Hudson Yards).

  10. Posted by Adam

    “urge the commission against basing decisions on aesthetics.”

    I would be alright with giving developers an exemption to build beyond the current tiny limit. But in return for flouting the will of voters, in return for putting the city at risk of having too much office space in the next downturn, and in return for building beyond the zoned height limits (because let’s face it they always do), the buildings should be nice to look at. That’s not asking for too much.

    • Posted by Jill

      Totally agree with you. They should give exemptions if the building is beautiful aesthetics should matter

    • Posted by LJL

      What do you see as being the risk of having excess office space during the next downturn?

      • Posted by Sierrajeff

        um, empty office space, foreclosed businesses, layoffs, all leading to a general sense of malaise… you know, the usual. Are you actually arguing that there’s no problem with reckless overbuilding?

        • Posted by LJL

          How can having some extra office space lead to layoffs and malaise? That doesn’t make any sense to me at all. You seem to be saying that somehow building extra office towers will cause a recession.

          • Posted by Sierrajeff

            Please describe how developers would pay loan costs on these empty buildings… *that’s* what leads to foreclosures, lowered maintenance standards (graffiti, etc.), an absence of follow-on or trickle-down businesses (restaurants, bars, drug stores, etc.)… *that’s* what leads to malaise.

            You seem to be saying the opposite – that having block after block of empty office towers, on which presumably neither rent nor loan payments are being made (and taxes, for that matter?) wouldn’t be a problem. Tell it to Detroit.

          • Posted by LJL

            SierraJeff, I’m trying to respond to your comment but there’s no reply button.

            Detroit’s current problems go way beyond commercial real estate cycles. I think you are mixing up cause and effect. In a downturn, yes, there will be some vacancies and foreclosures and some developers may lose money and some businesses will close. I don’t see how that could actually be caused by the scale of commercial building we are talking about on this thread. Rather, I believe it would be caused by broader economic factors. Instead, the question is really about whether the growth (and subsequently some failed projects and businesses) will be allowed to take place in San Francisco or whether it will have to happen elsewhere.

  11. Posted by BobN

    Prop M was passed mostly to stop the FiDi from encroaching on Chinatown and North Beach.

    With development directed the other direction, going from SOMA all the way down to Hunters Point, it’s well past time to get rid of the limits.

    • Posted by BobN

      “directed the other direction”… sigh

    • Posted by Sierrajeff

      Yeah it’s funny, even through the mid 1990s it seemed the assumption was that the Financial District would grow north along the waterfront, not south. Urban historians will enjoy debating the role of the Telegraph Hill nabobs, the teardown of the Embarcadero Freeway, etc. in shifting the growth to SoMa.

  12. Posted by two beers

    Limited development? We are in the midst of an epic, historic building boom, and prices keep going up. The glut of over-development in response to the speculation frenzy has only fueled that frenzy. No matter how much is built, prices won’t drop until the speculation frenzy -(i.e. the new housing bubble) pops. The current rapid pace of development not only doesn’t slow down price increases (contrary to simplistic and unsophisticated supply and demand models), it actually fuels the price escalation. .

    • Posted by jill

      this is just dumb.

    • Posted by SFrentier

      Me likey :)

    • Posted by Tommy Strange 12 beers.

      two beers right as usual. What is the quote about “when someone’s income demands they can’t…” ? Applies to the 99% of whom post here which are obviously the top 10%. Every serious economist/respected writer that was right about 2008, has been saying crash for over a year. Some since Obama appointed the FIRE/deregulation criminals Summers, Rubin etc. Barovsky, an Obama supporter then,the SIGTARP, details in his book the chicanery and futility of dealing with these whores in his book Bailout. And now Yellin. This is going to be a bigger Global liquidity crash, sparked by any number of little fires. Asset pumping to astronomical heights with no reflection in earnings. Huge corporate buybacks to boost. Margin credit to unheard of levels. So yes, two beers is right, no reason to fuel this building frenzy even more, when 1) half of completed rich peoples’ stuff won’t even be occupied. Including most of these million dollar condos. 2)Office occupancy will plummet with the crash since majority is dependent on not only Tech hot money, but hot money through all markets. Sadly, again, majority of us regular people that have always followed the rules, will be thrust deeper in no-way-out. I can only hope that most of the people drooling over the ejection of literally tens of thousands of the working class of SF…..have much in LOANS…and not real cash on hand. So then many of them go down too. Only thing I have to look forward too. I wonder two beers, do you post on this sight….just so a year or so down the road…..you can get a despair filled chuckle like I’m gonna get? When the rentier class controls our lives…….we have only one option left.

  13. Posted by Chris

    I think Proposition M needs to be revisited. Office buildings (whether small or large) in the central business make sense. There seems to be a false argument that we either need to maintain the status quo or allow a free for all, other citites manage growth and protect the character of their city without placing a hard cap on new office space. Also, can anyway seriously argue that SF has not changed dramatically within recent years even under the supposed “protection” of Proposition M? Proposition M has mainly succeeded at keeping commercial rents in SF at astronomical heights, which is bad for non-profits and small businesses, not just large corporations. The best thing that could happen to SF’s commercial rental market (from a tenat’s prospective) would be for the market to be somewhat overbuilt as this would lower rents. Creating a scarcity of commercial space does benefit one group, downtown lamdlords. This is why many downtown lamdlords heavily supported the passage of propositon M and many continue to support it–it keeps more money in their pockets. There is nothing strange about arguing for an amendment to proposition M. Again, it does not need to be a free for all, the city could simply allow more office space while still managing growth, protecting open space, and the character of neighborhoods.

    • Posted by jill

      agree. overbuilding commercial space is not bad as it will lower rents in general and attract more businesses to the city who cant afford the current astronomical prices.

      • Posted by jill

        i should say im not advocating mass overbuilding, but some free space in a downturn is not bad. prop M definitely needs revisiting, if jsut to update the allowed sq footage. am fine putting limits on it, but current limits way too small

        • Posted by Chris

          I agree. I am not advocating mass-overbuilding either. But, it seems hard for many people in SF to take a moderate position, and it seems even harder for them to acknowledge that circumstances change and rules need to be amended to reflect the changed circumstances. It is possible to loosen the restrictions on Proposition M without permitting a development free-for-all (a variable cap would be better, it could even be tied to the vacancy rate and also consider the needs of larger tenants, too. So, you could lower the cap when the overall vacancy rate is higher and there are many large spaces available, and you could raise it when the vacancy rate falls below a certain threshold and there are few large spaces available. There would also need to be consideration in the cap for to the time needed for construction). A moderate over-supply would be a good thing, as it would lower rents, but I am not calling for the market to be swamped with excess capacity.

  14. Posted by Dave

    High-rise construction is destroying the City. Thankfully M will soon kick in. And as the Bay Area grows the downtown Oakland metroplex will become the focus of office/business construction as it should be. M is a blessing for both SF and Oakland.

    • Posted by Chris

      Dave, almost all the highrise construction which you claim is “destroying the city” is RESIDENTIAL constructions, which means it is exempt from Proposition M. If you ar going to have an opinion it should be an informed one. And no, businesses, for the most part, will not move to Oakland, just like they did not move to Oakland the last time San Francisco had a Prop. M. cap “crisis.” Oakland will get some spillover, but not much. Businesses will move into the far outer suburbs, or out of the Bay Area entirely (for example, Sale Force plans to expand significantly in Indianapolis where it purchased its subsidiary Exact Target).

      Proposition M is primarily a blessing for downtown landlord. Downtown landlord were one of the biggest supports of Proposition M when it was on the ballot because they knew it would limit competition. It keeps rents high for them, and it is a headache for tenants, especially non-profits and small businesses who cannot afford the high rents and get priced out of the city. But, if a blander and more gentrified city is your goal, then I guess it is a good thing.

      • Posted by jill

        exactly . prop M benefits the rich incumbents. bad for new businesses, start-ups, non-profits and commonfolk

        • Posted by JR "Bob" Dobbs

          Also benefits those who don’t want SF to have more office towers for whatever reason – aesthetics, insufficient transportation or other infrastructure to handle more, etc. That was the driving force for the voter approval of Prop M. You can say they are/were stupid, or whatever, but they are getting precisely the result they wanted on that front. So they win.

          I’m for more building here. But it is not a tragedy – and is perhaps a good thing in the mind of most residents – if businesses choose to build in Indiana, or India for that matter, rather than adding more and more tower office space to SF, which brings headaches and problems as well as lowered rents. One might argue that Prop M keeps SF from becoming bland – another Orange County filled with bland towers. This is not a simple issue at all, and anyone claiming it is has either not thought it through or just wants to sell you something.

          • Posted by Chris

            I guess if your objection is simply to tall tower, than Proposition M does not really address your concerns. Most of the tall towers that some people have been railing about and claiming they are destroying the character of the city have been residential towers (and a few hotel towers, too), which are unaffected by Proposition M.

            Also, New York and Chicago are both full of tower (office and residential) and I don’t think anyone has ever mistaken either for Orange County (and Orange County has relatively few office towers and even the tallest one Orange County is about half the height of an average tall tower in San Francisco).

            Again, I am not advocating a free-for-all, but I think Proposition M as written was based on misconceptions and fear mongering. And, no one has ever claimed that development in San Francisco (regardless of which party you are) has ever been a simple issue.

      • Posted by CrockPot

        *standing ovation*

  15. Posted by Dave

    Also, its amusing to see these proposals which, given M, will likely never be built. The 2 million feet of office space proposed for the pier area ain’t happening – that alone would take 2.5 year worth of allotment. The Goodwill site proposal for half a million sq feet of office space takes more than half a year’s allotment.

    This will force smaller developments as developers will not want the 875,000 quota going to one developer but split among 2 or 3. Its a shame banking was allowed but at least high-rise office construction in SF should be coming to a defector halt in a few years.

    • Posted by Chris

      Again, Dave. Read my comment above. SF had towns of highrise residential construction proposals which are completely unaffected by Proposition M. Downtown construction will continue strong, even after proposition M kicks in. You are completely uninformed.

  16. Posted by BigV

    seriously — what is wrong with a construction boom and bust in commercial properties? A glut of half empty offices with super cheap rents can be a real benefit to the city, as that is how the next wave of startups and innovative new businesses can get started. Booms and Busts are actually both very good things, and each plays their role in a healthy vibrant economy.

  17. Posted by Bob

    I have never understood the people who satisfyingly point out in bust times that SF is better off because we limit the amount of commercial construction that can built in a given period of time…
    Cue the harpys to complain about the native SF businesses which will be displaced because we dont allow office construction and businesses of greater means are able to outcompete for space in SF. We are so dumb.

  18. Posted by anon

    “Meanwhile in NYC. 28 Acres of land fully developed in 6 years”

    Yes, and that helped lower rents? Ridiculous. Shanghai has 25 million people. Are rents in decent commercial or residential neighborhoods cheap? F no they’re not!

    Building more does absolutely nothing to lower prices. All building more tech offices will do is make just about every single thing in the city more expensive….not to mention overload capacity of public transport auto lanes, bike lanes and sidewalks. Just flat out dumb to build so much without any infrastructure improvements.

    • Posted by Chris

      So, the rules of supply and demand magically do not apply to SF? Ah, yes, we have heard that nonsense idea spouted many times before. And, the more restrictions the city places on residential and commercial development, the greater the scarcity of housing and commercial space and the higher the price of both. But, even in the face of this evidence, people like you make false comparisons and then without any support try to argue that increasing supply either has no impact on prices or somehow actually raises prices. Also, no one has ever stated that infrastructure should not be improved or expanded when necessary–in fact, there is a ballot measure this election to tie Muni funding to population growth. More importantly, new businesses and new residents pay taxes–a lot of them.

      The city has no shortage of money, it just has a lot of politically well-connected interest groups that see to it that a nice chunk of the budget goes to other things besides capital improvements. It is possible to have growth and to build the infrastructure to support it, and it can be done in a thoughtful way that does not involve blunt caps. But, I assume such nuances are lost on someone like you who adheres to the old-school SF anti-development dogma. As Barney Frank famously said, “Trying to have a conversation with you would be like arguing with a dining room table.” You have tuned out of reality and live permanently in your own fantasyland. The rest of us will work for solutions in the real world.

      • Posted by grumpy

        There is a measure on the ballot also to balance transit, so what? Muni fundng and balance transfer are just responses to the crap from the SFMTA and lack of planning for growth with regards to growth. Painting the streets green and pink do nothign.

    • Posted by anon

      “Yes, and that helped lower rents? ”

      Absolutely it did – RELATIVE to what they would have been without the additional supply.

    • Posted by CrockPot

      Your solution?

      • Posted by grumpy

        Prop M

      • Posted by Chris

        I stated my solution with respect to commercial properties. Amend Proposition M and institute a variable cap that increases as demand rises, and decreases (i.e. imposes tighter limits) as demand begins to fall, while timing for the 2-year build out process. It is a smart solution and I think much better than a hard cap. Also, proposition M does nothing to address aesthetic, which seems to be what riles certain folks up–that needs to come from design guidelines from the Planning Commission and the Planning Department.

        I have solutions for the residential housing crunch, too, but that would be a much longer post and a different topic.

        • Posted by grumpy

          Well no one is amending prop M so you are the one in Fantasy land, your solutions are academic and meaningless.

  19. Posted by grumpy

    I took economics many years ago but still remember that supply and demand lines intersect at what is called an equilibrium. That equilibrium could move up to a higher value, i.e. higher costs. So it is possible to have an increase in supply and still have an increase in price if the demand curve is growing higher than the supply one. Runaway demand…inflation.

    • Posted by Chris

      No one said that demand in most cases is perfectly elastic (which you should remember if you took economics. Also, inflation is not runaway demand, you are incorrect. In fact, inflation is caused by an oversupply of money combined with (what may be counterintuitive to some people) a lessening of demand for money. Increased demand for money would actually lower prices.

      • Posted by grumpy

        funny you left out elasticity when you made the comment to anon. And there is alot of dollars chasing supply, so real-estate inflation.

        • Posted by Chris

          Grumpy, I did not leave out elasticity intentionally (and it is not really that relevant here), and you and the other poster are wrong about the elasticity of the real estate market. Also, if the demand for dollars were high and relevant here, it would support lower prices, not higher prices–see my last sentence above. Your name suits you because you have little to contribute, you don’t bother to fully read or understand others’ comments, and you are entrenched in your position and narrow-minded (which begs the question why you bother to post here at all, unless you just like being a grouch and trying to argue with others). You have not said much that is interesting or contributes to anything–take up a new hobby.

          • Posted by grumpy

            Your not saying anything other than trying to throw shade, and effing it up, in all ways, get a grip.
            You did leave it out intentionally because otherwise you would have to recognize that anon was right, prices can rise as supply increases. You were and ARE wrong, so own it. OWN YOUR SH!T QUEEN, straight or otherwise.

            LUV ya anyway.

        • Posted by Chris

          Grumpy, you could have a modest career as a drag queen doing a Tyra Banks impersonation if you keep up the practice. I am glad you posted your last comment, not only because it was slightlly amusing, but also because it officially proves you are crazy. I will use my Barney Frank line from my earlier comment, “Trying to have a conversation with you would be like arguing with a dining room table.”

          I give you a B+ for passion, an F for making any sort of sense, and B- for the sassy queen routine. I think this thread is done. Take care and have a good weekend.

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