Limits on Office Development
Limits on Office Development
Links the approval of new office development to the construction of affordable housing and changes the Planning Commission’s criteria for approvals.
What the Measure Would Do
Prop. E proposes amendments to existing citywide limits on new office development. It would link the amount of new office space that can be approved annually in San Francisco to the city’s performance on building new affordable housing. It would allow projects that provide affordable housing and space for community arts or local retail, particularly in the Central SoMa neighborhood, to proceed sooner by borrowing from future allocations. The measure would also change the city’s criteria for approving new office development.
San Francisco currently limits the total amount of new office construction that can be approved each year to 950,000 square feet, a program commonly known as Prop. M after the 1986 ballot measure of that name.1 Of this, 75,000 square feet is reserved for projects between 25,000 and 50,000 square feet (called the “small cap”), while 875,000 square feet is reserved for office buildings greater than 50,000 square feet (called the “large cap”). Any office development less than 25,000 square feet is exempt from the cap.2 If the Planning Commission does not allocate the full cap amount in one year, the remaining square footage accrues to future years.
Prop. E would link the amount of office construction allowed in the large cap category to the amount of affordable housing that began construction in the prior calendar year. More specifically, the 875,000-square-foot large cap would be reduced by the same percentage that San Francisco is falling short on meeting its affordable housing goals. (California sets a housing goal for each city in the state through a process called the Regional Housing Needs Allocation, or RHNA.) For example, if San Francisco produces only 50% of its affordable housing goal one year, then the city can only approve 50% of the 875,000 square feet in the large cap category the following year.
The measure would also limit the amount of large cap office space that may be allocated in the Central SoMa neighborhood to 6 million square feet until at least 15,000 new housing units are produced in the larger South of Market area.
Two categories of projects would be treated differently:
1. The measure has created a 1.7-million-square-foot Central SoMa Incentive Reserve in order to enable six specific office projects already in the pipeline to move forward. This reserve would be separate from the large cap category in the year of approval but would borrow square footage from future large cap allocations. Prop. E establishes a set of criteria to allow these already-negotiated deals to proceed: All submitted their preliminary applications before September 11, 2019, and each provides one of the following public benefits: dedicating land of more than 10,000 square feet for affordable housing, reserving at least 10,000 square feet for nonprofit arts groups or local retail at below-market rent for 30 years or funding and building a new or replacement public safety facility of more than 10,000 square feet in SoMa.
2. The measure would create an Office Jobs/Affordable Housing Balance Incentive Reserve, which would also allow certain projects to borrow against future large cap allocations. A project could access this reserve if it includes sufficient affordable housing to meet 100% of the affordable housing demand it would generate (meaning that it could house all of the people who would hold lower-wage jobs on the site). The city’s current calculation would require 809 housing units per 1 million square feet of new office space.3 Prop. E would mandate that this calculation be updated every five years, and it would require the affordable housing to be either on site or within a Community of Concern as determined by the Board of Supervisors.
Prop. E would also change the criteria that the Planning Commission must consider when approving office allocations.
First, it would remove criteria related to the General Plan, design quality, anticipated uses of the project, the needs of existing businesses and the existing office supply’s ability to meet those needs, proposed occupancy (single vs. multiple tenants) and the use of transferable development rights. It also would remove language in the planning code that bars the Planning Commission from considering how much a project sponsor pays into the city’s housing or transit coffers.
Second, it would add new criteria for the Planning Commission to consider, including whether the project includes new affordable housing units that are on site or in a Community of Concern, as defined by the Board of Supervisors, whether the affordable units are required by a development agreement with the city, whether the project will produce 100% of the affordable housing demand it generates and to what extent the project includes community improvements beyond what is required.
The measure would also change the appeals body for office allocation applications linked with projects with a development agreement from the Board of Appeals to the Board of Supervisors.
Prop. M was passed in 1986 as the culmination of years of debate over the growth of downtown San Francisco and the role the city should play as a job center in the region. Between 1965 and 1982, the city’s office space more than doubled. Much of this growth was within walking distance of the new BART and Muni Metro systems, which were built in part to accommodate the new workers downtown. These changes were significant, and not everyone embraced them. The downtown high-rise boom spurred a series of ballot initiatives by growth-control advocates, along with bitter case-by-case fights over new buildings and warring studies on the fiscal impacts of high-rises.
The 1985 Downtown Plan represented a “grand compromise” in the high-rise growth wars. It significantly shifted where new commercial buildings could go and what they could look like, while allowing San Francisco to create new jobs near transit and respond to global economic shifts toward a service and innovation-based economy.
The office cap was first included on an interim basis in the Downtown Plan and then permanently adopted by voters as Prop. M in 1986.4 It was the first annual limit on office development in the United States.
During the real estate crash of the late 1980s and the recession of the early 1990s, few office developments went forward, and the amount of allowable office space accrued to several million square feet. In fact, the office cap was not likely a major limiting factor to new office development until the dot-com boom of the late 1990s. More recently, the office cap has again constrained new office projects: As of September 2019, there were more than 6 million square feet of pending large office projects that had applied for less than 25,000 square feet of allowable office space within the cap. An additional 900,000 square feet of proposed office projects are now going through the pre-application permitting process and will join the backlog.
Debate around Prop. M has recently resurfaced due to a confluence of factors. High-wage jobs have grown, and new housing construction has not kept pace, creating severe competition for housing and exacerbating displacement and homelessness. At the same time, one of the city’s newest tools for addressing these challenges is currently hamstrung. The Central SoMa Plan, which creates new development opportunities near the planned SoMa Central Subway station, is anticipated to generate more than $2 billion in public benefits, including affordable housing. However, those benefits cannot move forward if several key office sites do not receive a large cap office allocation.
Prop. E is sponsored by TODCO, a nonprofit affordable housing owner and advocacy organization. TODCO was among several groups that sued and settled with the city over the Central SoMa Plan. After this measure was proposed, Mayor Breed introduced a competing measure, the Affordable Housing and Small Business Priority Reserve, which would have allowed for additional office allocations for projects that provide extraordinary public benefits. She later pulled this measure from the ballot.
As an amendment to Prop. M, which was passed at the ballot, Prop. E must go back to the voters for approval. Any future amendments to Prop. E would also need to go back to the voters. It was placed on the ballot with signatures and requires a simple majority (50% plus one vote) to pass.
• By tying the approval of new office space to San Francisco’s affordable housing production, Prop. E could create additional political will and new allies for affordable housing funding.
• Prop. E would create a path forward for some developments that would bring a very high level of community benefits — including affordable housing — to Central SoMa, a key neighborhood for growth.
• The Bay Area’s market for office development has evolved significantly over the past decade. Prop. E could benefit the region to the extent that any companies it pushes out of San Francisco choose to grow or settle in downtown Oakland, downtown San Jose or other transit- and pedestrian-oriented places.
• On its face, Prop. E promises to bring jobs and affordable housing into balance. While that is a reasonable goal, it would not create resources to produce affordable housing. All it could do is reduce future office development. In fact, reducing office development would also reduce impact fees that pay for affordable housing — precisely the opposite of the measure’s goal.
• Downtown San Francisco/SoMa is one of the best locations in the region for jobs. Because the area is served by the highest-capacity transit, far fewer workers commute by car to these jobs, which reduces congestion, greenhouse gas emissions and air pollution. While we hope that businesses that cannot locate or stay in San Francisco choose to take root in downtown Oakland, downtown San Jose or other locations near regional transit, that hasn’t been the case historically. Between 2010 and 2015, the vast majority of office space in the region was built more than a half mile away from regional transit.5
• Today, small businesses and nonprofits already struggle to compete with well-capitalized technology companies for office space in San Francisco.6 If office development does not keep pace with demand, rents could increase further, making this pressure even worse. As a result of this measure, San Francisco could end up with a less diversified economy that is more vulnerable to economic downturns.
• The City Controller’s Office projects that Prop. E would reduce the city’s projected future gross domestic product by 8.5%, a loss of $23 billion over the next 20 years.7 Impacts include reduced funding for affordable housing and less growth in property tax revenues and gross receipts tax revenues, both of which help fund social services and public infrastructure like parks and transit.
• Prop. E would radically change the Planning Commission’s criteria for weighing office approvals, replacing objective criteria with subjective considerations and essentially making the approvals process “pay to play” for project sponsors. While this could result in additional benefits for the public, it is less transparent and less fair in the long run.
• Housing development takes many years, and the state designs its RHNA housing targets to be met over eight years. By pegging commercial development and affordable housing development to one-year time frames, this measure seems set up to ensure that San Francisco fails to meet its goals, particularly given the city’s past track record and the significant increases to RHNA targets that are expected in the coming years.8
While SPUR agrees that the city and region have not figured out how to grow gracefully, we resist this measure’s presumption that limiting job growth will make San Francisco more affordable. Prop. E would not create new affordable housing and would likely decrease an existing source of affordable housing funding. In addition, by limiting the supply of commercial space, this measure would continue to increase office rents and force out small businesses, nonprofits and companies that employ middle-wage workers.
SPUR believes that a mix of commercial and residential growth is important to the health of a community, and we recognize how much more work San Francisco must do to build affordable housing. However, we believe that it makes more sense to seek a balance of jobs and housing at the regional level. Today’s economy and housing market are regional. People often change jobs within the region without moving, or they move to new homes without switching jobs.
We believe that far better ways to address the challenges facing San Francisco are to build more housing across the region that is affordable to middle- and lower-income households, to invest more in the infrastructure and services that meet the needs of people who live and work in San Francisco and to focus on lifting up those left out of the Bay Area’s economic boom.
1 City and County of San Francisco, Planning Department, “Office Development Annual Limitation Program,” https://sfplanning.org/office-development-annual-limitation-program
2 Office development by the state or federal government is also exempt from the cap. However, the square footage of a federal or state office project does count toward the annual limit and could impact other office developments that are also seeking approval.
3 The calculation comes from the city’s Jobs Housing Nexus Analysis, May 2019.
4 In 1985, in an effort to get the Downtown Plan approved by the Board of Supervisors, Mayor Dianne Feinstein’s administration proposed an annual limit of office growth for three years based on an economist’s projection of demand for 950,000 square feet of space per year. Feinstein’s proposal would have expired in 1988 and could have been modified by the Board of Supervisors. However, in November 1986, voters approved Prop. M at the ballot, making the annual cap permanent and requiring voter approval for future modifications.
5 SPUR, Rethinking the Corporate Campus, 2017, page 20, https://www.spur.org/sites/default/ files/publications_pdfs/SPUR_Rethinking_the_Corporate-Campus.pdf
6 Groups including Community Vision (formerly the Northern California Community Loan Fund), Northern California Grantmakers and several city departments work on fighting the displacement of nonprofits and small businesses through technical assistance, real estate advice and financial programs. See: https://communityvisionca.org/sfsustainability/ and https://ncg. org/nonprofit-displacement-project
7 City and County of San Francisco, Office of the Controller, Office of Economic Analysis, Tying Office Development to Affordable Housing Production: Economic Impact Report, January 27, 2020, https://sfcontroller.org/sites/default/files/Documents/Economic%20Analys... development_economic_impact_final.pdf
8 According to the Planning Department, from 2015 to 2018, San Francisco produced between 35% and 69% of its RHNA goals. After 2023, we anticipate RHNA numbers to be significantly larger due to state legislation that has changed how the state develops projected need.