Corporate building facade in office windows made of glass and steel frame in Frankfurt am Main

SB 6: California Legislative Initiatives Pave the Way for Residential Expansion in Commercial Zones 

in Public Policy/Real Estate/Volume VI

By Allen Nobel 

Introduction:

In the ever-changing world of California’s commercial real estate, a notable trend is emerging: the repurposing of vacant office spaces into multifamily units, industrial facilities, and retail establishments. According to the Winter 2024 Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey, about a quarter of property owners and operators across the state are planning to embark on such projects within the next few years.[1] This shift comes as industry players grapple with concerns over high interest rates, declining property values, and the lingering impact of remote work on office buildings nationwide.[2]

In regions like Northern California, where cities like San Francisco are seeing office vacancy rates soar above 35.6%, the outlook for new office developments has significantly dimmed.[3] Just a year ago, there was optimism about future projects, but interestingly, now, there’s a noticeable shift in sentiment. Similarly, in Southern California, fewer respondents anticipate new office constructions in the coming months compared to previous expectations.[4]

As businesses reconsider their office space needs, navigating the leasing process has become increasingly complex. As a result of this recent shift, landlords are more willing to cover the costs of building improvements, a responsibility traditionally shouldered by tenants.[5] This adaptability is proving crucial for landlords aiming to maximize occupancy rates in their buildings.[6]

Further, amid this transitional period, the concept of adaptive reuse has gained traction as a solution for revitalizing underutilized office spaces. Not only does it offer landlords a means to breathe new life into their properties, but it also meets the evolving demands of tenants and communities.

Senate Bill 6 (“SB 6”), commonly known as the Middle-Class Housing Act of 2022, introduces significant changes to housing development regulations within commercial zones to convert vacant offices into apartments and condominiums.[7] Effective from July 1, 2023, until January 1, 2033, the legislation addresses the closure of brick-and-mortar commercial retailers and confronts California’s persistent housing challenges.[8]

Legislative Overview:

As outlined by California legislators, the Planning and Zoning Law requires counties and cities to create long-term plans for how their communities will grow, including where housing will be built. This plan, known as a general plan, must include a housing element that identifies suitable land for housing. If there is not enough land identified for housing, especially for low-income households, local governments must change their zoning laws to make room for more housing.[9]

SB 6 introduces changes to these rules. Under SB 6, housing projects can be built on land typically used for offices, stores, or parking lots if certain conditions are met.[10] These conditions include rules about density, informing the community about the project, paying workers the prevailing wage in conjunction with labor unions, and ensuring that contracts for building projects are offered in a fair way.[11] Furthermore, should there be concerns regarding a developer’s compliance with regulations for fair allocation of building contracts, individuals have the recourse to pursue legal action to halt the developer’s activities.[12]

In terms of process, SB 6 requires developers to inform all existing tenants about their plans to build new housing and assist these businesses with relocation if needed.[13] Local governments still hold the discretion to prohibit SB 6 on certain parcels if they have valid reasons.[14] It is important to note that SB 6 does not change or disregard existing zoning laws about developing multifamily units, protecting the environment, or ensuring fair treatment of workers.[15]

Furthermore, SB 6 mandates that the Department of Housing and Community Development conducts studies to understand how these changes impact housing development.[16] These studies will include data on the number of projects built and the number of units created. SB 6 also states that these changes apply to all cities in the State of California.[17]

SB 6 adds a new section, 65852.24, to the Government Code, permitting housing development projects, including both 100% residential and mixed-use projects with a minimum of 50% dedicated to residential use, without the need for rezoning.[18] Unlike Assembly Bill 2011 (“AB 2011”), its counterpart, SB 6 does not establish a ministerial (automatic) approval pathway but allows residential uses on commercially zoned property under specific conditions.[19]

SB 6 aims to simplify the process of building homes, particularly for middle-income families, in areas where offices and commercial uses are commonly found. 

Criteria:

To invoke SB 6, a housing development project must meet specific eligibility criteria, including that it must be located on a parcel of 20 acres or less, and in a zone allowing retail, office, or parking uses.[20] Developers must follow fair wage practices, hire skilled workers, and assist qualifying businesses in relocating.[21] SB 6 mandates that the project must meet or exceed the appropriate density for lower-income housing, complying with the RHNA Housing Element site provisions.[22] Developers must also satisfy all permitting and procedural code requirements of the zone allowing higher residential density.[23]

Furthermore, SB 6 allows residential uses on commercially zoned property under specific conditions. The proposed project must be in an urban area that is not adjoined to any site where more than one-third of the square footage is dedicated to industrial use, it must be a “housing development project” that includes residential units only or a mixed-use project with at least 50% of the square footage dedicated to residential use and must be consistent with any applicable sustainable community strategy or alternative plan.[24]   

Despite the advantages of SB 6, projects are subject to many regulations, including the Coastal Act, California Environmental Quality Act (“CEQA”), Housing Accountability Act (“HAA”), Density Bonus Law, and fair housing obligations.[25] Local agencies can exempt certain parcels under specific conditions, necessitating careful consideration.[26]   

Local Agency Implementation:

Local agencies play a vital role in SB 6 implementation. They have the power to create local laws in line with SB 6, streamlining processes without requiring extensive environmental studies.[27] Local authorities can also choose to exempt certain areas from SB 6 under specific conditions.[28] This local influence emphasizes the importance of engaging with local entities, thoughtful planning, and collaborative efforts.[29]  

SB 6 marks a significant shift, not just in addressing housing challenges but also in repurposing underutilized commercial spaces. Whether you are a developer, part of a local agency, or a stakeholder, understanding the eligibility criteria, making thoughtful adjustments, and navigating regulations collectively unlock the potential of this legislation, and foster sustainable and inclusive residential development in commercial zones.

 In Los Angeles County alone, there’s a significant potential for addressing housing shortages by repurposing commercial properties. A 2022 report by the RAND Corporation’s Jason Ward and Daniel Schwam estimates that around 2,300 commercial properties could potentially yield between 72,000 to 113,000 housing units.[30]   

However, the feasibility of converting office spaces into residential units varies depending on factors such as building type, housing unit configuration, and regional policies. While some view conversions as a promising solution to vacant spaces, completed projects haven’t seen a significant increase since the pandemic, according to CBRE.[31]

Various regions have implemented programs and ordinances to facilitate adaptive reuse. For instance, Los Angeles’ Adaptive Reuse Ordinance of 1999 streamlined the conversion process, resulting in the creation of nearly 20,000 housing units in downtown LA.[32] New York City’s 421-g program provided tax incentives for commercial-to-residential conversions from 1995-2006. Additionally, initiatives like tax abatements in Washington, D.C. are emerging to encourage such projects.[33]

The primary hurdle for developers lies in securing financing for the conversion of office spaces into housing, as banks are reluctant to provide funding due to the perceived risks associated with these projects. Despite potential financial challenges, incentives like tax exemptions can aid in offsetting costs. Different types of properties pose varying levels of difficulty for conversion; hotels and motels tend to be easier to convert compared to office buildings, which may require substantial modifications.[34]

Although newer office buildings may present challenges due to their design, seismic retrofitting, and other structural considerations, they may still be viable candidates for conversion. Financial support from initiatives like California’s Homekey program can also facilitate affordable housing conversions.[35]

Eden Housing, a nonprofit organization specializing in affordable housing, is engaged in several conversion projects in California.[36] It emphasizes factors such as location, structural analysis, and cost evaluation when determining the feasibility of a conversion project.[37]

The rise of remote work and the potential decline in demand for office spaces post-pandemic could lead to an “office real estate apocalypse.”[38] Despite the challenges, this shift may make office conversions more attractive and financially feasible for housing solutions. Policymakers are increasingly recognizing the potential benefits of adaptive reuse in addressing both housing shortages and the economic impact of underutilized office spaces.[39]

Overall, stakeholders remain cautiously optimistic about the future of adaptive reuse, viewing it as a critical component in addressing housing needs while repurposing commercial spaces in the face of evolving work trends.

Current Examples of Adaptive Reuse: 

As SB 6 begins to be implemented into cities, and developers begin to analyze the feasibility of such projects, it might be beneficial to look at a few instances of finished and in-progress office-to-residential conversions.      

Under construction: The Daily News Building, also known as 25 Water Street, stands as the most extensive office-to-residential conversion project currently underway in North America. Situated in Manhattan’s Financial District, this building, originally designated to serve as The Daily News headquarters, was finalized in 1930. Crafted in the Art Deco architectural style, it received recognition as a National Historic Landmark in 1989.[40] In alignment with New York City’s initiative to introduce 20,000 new residences by repurposing underutilized office spaces, the property’s owners—GFP Real Estate, Metroloft, and Rockwood Capital—have announced plans to transform the 22-story structure into more than 1,300 residential units.[41] This ambitious project entails substantial renovations, including updates to the building’s plumbing and electrical systems, seismic retrofitting, and the integration of luxury features such as high-end finishes and appliances.[42] Moreover, the development will introduce new amenities for residents, such as a fitness center, rooftop deck, and concierge service. Leveraging the expedited timeline of repurposing existing structures compared to erecting new ones, the project is projected for completion by the conclusion of 2024.[43]   

Completed: Trumark Urban’s conversion of The Pacific, a former Dental School in San Francisco’s Pacific Heights neighborhood, stands as a prime example of successful adaptive reuse. Originally built in the 1960s, the structure was repurposed into high-end residential units, showcasing the city and bay views. Handel Architects led the transformation, leveraging the building’s spacious floorplates and high floor-to-floor spans to create expansive interiors.[44] The conversion process involved significant modifications to meet residential building codes while retaining the original glass facade, adding a touch of distinction to the development.[45] The successful transformation of The Pacific, fully sold out in 2019, underscores the effectiveness of adaptive reuse in meeting contemporary housing demands while preserving architectural heritage.[46]

Moreover, completed in 2022, Park + Ford exemplifies a successful transition from office to residential space. In a collaboration between USAA Real Estate, now operating as Affinius Capital, and Lowe, a renowned real estate investor, developer, and manager, the project involved repurposing the former Park Center office complex into a contemporary apartment community.[47] Situated near Washington, D.C., the development encompasses 435 units alongside 115,000 square feet of office space.[48] Leveraging insights from their previous office-to-residential conversion at The George in Wheaton, Maryland, Lowe devised a strategy to optimize the traditional office features of the towers, such as 10-foot ceilings and expansive floorplates.[49] This approach facilitated the transformation of the two 14-story office buildings into spacious apartment homes, complemented by a host of sought-after community amenities.[50]  

Recommendation:     

As we delve into the realm of repurposing commercial spaces for residential uses, particularly the conversion of large office spaces into housing units, it is evident that we are exploring a concept with both immense potential and risk. The idea of adaptive reuse is undeniably appealing, offering a sustainable solution to both housing shortages and the revitalization of underutilized properties. 

Plumbing issues, window configurations, mechanical complexities, and various other factors present difficult obstacles that must be carefully addressed. While the Middle-Class Housing Act of 2022, embodied in SB 6, offers a promising legislative framework, we must critically evaluate its feasibility in practice. The Bill’s provisions may provide a solid foundation, but the practicalities of converting vast office spaces into livable homes require meticulous planning and execution. Additionally, the reluctance of banks, especially given their current stretched resources, to finance such conversions poses a significant obstacle for developers.

Examining examples of successful projects alongside those that encounter hurdles will provide invaluable insights into what works best within the parameters of this Bill. We need to consider not only the technical aspects but also the socio-economic implications of such conversions. It is important to inquire about whether the resulting housing units will truly address the needs of the community, particularly in terms of affordability and accessibility. These are questions that demand thoughtful consideration as we navigate the complexities of adaptive reuse.

While I wholeheartedly support the notion of adaptive reuse, I believe we must temper our enthusiasm with an assessment of the realities we face. Amidst the challenges of large-scale office-to-housing conversions, it’s worth considering the alternative of demolishing office spaces rather than navigating the hurdles of conversion. However, there’s also potential for significant success in repurposing office spaces into industrial or retail establishments. By observing and learning from both successes and setbacks, we can refine our approach to ensure that our efforts toward adaptive reuse yield sustainable and impactful outcomes for our communities.

In essence, while the road ahead may be fraught with obstacles, it’s also brimming with opportunity. With a collaborative and innovative approach, we can transform the landscape of California’s commercial real estate, breathing new life into neglected spaces and meeting the evolving needs of our communities.


[1] Allen Matkins/UCLA Anderson Forecast California CRE Survey Finds Adaptive Reuse of Office Buildings is on the Rise, ALLEN MATKINS (Feb. 7, 2024), https://www.allenmatkins.com/real-ideas/winter-2024-survey-finds-adaptive-reuse-of-office-buildings-is-on-the-rise.html.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] SB 6 – The Middle Class Housing Act of 2022, BURKE, WILLIAMS & SORENSEN (last visited Apr. 11, 2024), https://www.bwslaw.com/news/sb-6-the-middle-class-housing-act-of-2022/?s&pdf=7946.

[8] Id.

[9] Id. 

[10] SB 6 Local Planning: Housing: Commercial Zones Legislative Counsel’s Digest, CALIFORNIA LEGISLATIVE INFORMATION, (Sep. 29, 2022), https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB6.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] SB 6 – The Middle Class Housing Act of 2022, BURKE, WILLIAMS & SORENSEN (last visited Apr. 11, 2024), https://www.bwslaw.com/news/sb-6-the-middle-class-housing-act-of-2022/?s&pdf=7946.

[19] Daniel R. Golub, California Legislature Creates Pathways for Residential Development on Commercially Zoned Land, HOLLAND & KNIGHT, (Sep. 1, 2022), https://www.hklaw.com/en/insights/publications/2022/09/california-legislature-creates-pathways-for-residential-development.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Id.

[27] SB 6 – The Middle Class Housing Act of 2022, BURKE, WILLIAMS & SORENSEN (last visited Apr. 11, 2024), https://www.bwslaw.com/news/sb-6-the-middle-class-housing-act-of-2022/?s&pdf=7946.

[28] Id.

[29] Id.

[30] Janet Nguyen, Converting Office Space to Apartment Buildings is Hard. States like California are trying to change that, MARKETPLACE, (Mar. 13, 2023), https://www.marketplace.org/2023/03/13/converting-office-space-to-apartment-buildings-is-hard-states-like-california-are-trying-to-change-that/.

[31] Russel Morse, Two New Laws Authorize Multifamily Residential on Commercial Property, JDSUPRA, (Dec. 8, 2022), https://www.jdsupra.com/legalnews/two-new-laws-authorize-multifamily-2346856/.

[32] Janet Nguyen, Converting Office Space to Apartment Buildings is Hard. States like California are trying to change that, MARKETPLACE, (Mar. 13, 2023), https://www.marketplace.org/2023/03/13/converting-office-space-to-apartment-buildings-is-hard-states-like-california-are-trying-to-change-that/.

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Id.

[38] Id.

[39] Id.

[40] Graeham Hui, Adaptive Reuse: 6 Office-to-Residential Conversions in North America, SPARK, (Jul. 26, 2023), https://blog.spark.re/adaptive-reuse-6-office-to-residential-conversions-in-north-america-2/.

[41] Id.

[42] Id.

[43] Id.

[44] Id.

[45] Id.

[46] Id.

[47] Id.

[48] Id.

[49] Id.

[50] Id.