Date: June 19, 2017
1986. The American president was an actor/tv star-turned-politician and the U.S. media was busy chasing a story that would embroil the White House in congressional hearings and scandal (Iran-Contra). Meanwhile, in San Francisco, voters were adopting Proposition M, the first legislation anywhere in the country to limit high-rise office development on an annual basis.
2017. The American president is a reality TV star/businessman-turned-politician and the U.S. media is busy chasing a story that may embroil the White House in further congressional hearings and scandal. Meanwhile, in San Francisco, Prop M lives on.
For a detailed history of Prop M and background to the reasons it was adopted, see this article.
Photo credit: Park Tower at Transbay
Despite the striking parallels between today and 1986, what you need to know about Prop M is that it restricts development of high-rise office projects in downtown San Francisco to 875,000 gross square feet (gsf) per year. (An additional 75,000 gsf is allocated for small-scale office projects, those offering 25,000 to 49,999 gsf.) Any allocation not used in a given year, which begins October 17, rolls into the next annual allocation.
There’s a hole in our buckets
In reality, we are only now truly beginning to feel the “growth limitation” aspect of Prop M. Since it was enacted in 1986, we’ve seen a couple of major down cycles during which little if any high-rise projects were built. This meant that several years of Prop M allocations accumulated, filling a “bucket” which fed additional new development – beyond the annual 875,000 gsf limit — during the upturns in the economy. Another bucket of allocations was effectively created over the years by projects which received Prop M allocations but for which construction was delayed. For example, 535 Mission was completed more than 12 years after receiving its Prop M allocation. This “hold bucket” also allowed for more than the 875,000 gsf of deliveries to meet market demand. Both buckets are now empty, which means we are finally witnessing the impact of limited annual growth.
Some argue that Prop M has had a positive impact on the downtown office market because by limiting high-rise development, San Francisco has not suffered the damaging vacancy problems some cities without limits (e.g. Houston, New York, Los Angeles) have faced during intense economic downturns. On the other side of the argument, some say that the limits on development hamper the city’s economic growth and push up rents.
Whatever your position, Prop M is arguably San Francisco’s most important Millennial and, unlike some of that demographic, it is seemingly here to stay.
With that in mind, here’s all you need to know about the current the state of play in the Prop M landscape, courtesy of JLL research:
- As of this writing, there is 1,228, 767 gsf available under Prop M.
- There is a total of 3,805,989 gsf of projects in the Prop M pipeline awaiting allocation. This means that projects totaling 2,577,222 gsf won’t receive Prop M allocations this year.
Another 875,000 gsf becomes available for allocation on October 17. This takes the nominal deficit down to 1,702,222 gsf. However, there are another 4,669,870 gsf of pre-application projects in the development pipeline. These are projects going through environmental review and preliminary assessment by the planning department but which have not yet filed for a Prop M allocation. This takes the total Prop M allocation pipeline up to 6,372,092 gsf.
If nothing new is added to the pre-application queue – an unlikely scenario given demand for new space in downtown San Francisco — it would take eight years for all of the current projects to receive blessing under Prop M. Bottom line, after five years of positive net absorption, demand for good office space in San Francisco remains strong and Prop M is the main reason our market is not even close to outpacing demand.
I have closed over 14 million square feet of lease transactions and assisted with strategy and underwriting assumptions on over $8 billion of downtown acquisitions since 2000. With 26 years of experience representing Landlords (16 at JLL), I co-leads the Agency Leasing practice and am responsible for a 20 building 7 million sf agency leasing portfolio in downtown San Francisco.
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I help tell the real estate story and define the market in San Francisco through research analysis, examining specific data points to identify macro trends.
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