DATELINE–San Francisco, Calif.

San Francisco Lofts Get New Life as Working Warehouses

Real estate developers in San Francisco are facing a novel dilemma: as sales of live/work loft apartments continue to plummet, some are considering converting the newly constructed living spaces into commercial warehouses.

The city that has become known as ground zero of the Multimedia Revolution has been hit particularly hard by recent revaluations of high-tech holdings on Wall Street. As the market adjusts, the Internet-based startups that have made San Francisco a hot destination for techno-savvy professionals are beginning to tighten their belts, putting many out of work and freezing bonuses for others.

As a result, what had become one of the nation’s most expensive real estate markets is experiencing a sudden glut in luxury housing, particularly high-priced live/work lofts.

During the 90’s, a critical housing shortage spurred San Francisco developers to look for new ways to build homes in a city renowned for its conservative planning code. Many found a solution in the form of “artist live/work” spaces.

In 1988, the City of San Francisco adopted a zoning control ordinance to “facilitate the preservation of affordable live/work housing for artists…and the construction of new live/work units.” This little known loophole in the housing code made it possible for contractors to bypass much of the red tape usually associated with new construction. In 1990, less than 50 new live/work units were built in San Francisco. By 1997, that number had ballooned to over 600 new sites.

Developments designated as “live/work” have flourished because they are significantly cheaper to build than traditional residential housing but can be sold at comparable prices. According to Victor Edwards, an architect with Restoration Design, “live/work no longer means low-rent – it’s this city’s version of the condominium. But without the amenities.”

Because the live/work loophole was largely meant to protect artists living in sub-standard conditions from being evicted, most new live/work units are built with cheap materials like aluminum, sheetrock and concrete. Even though the new live/work units are modeled to resemble raw warehouse spaces, they can still fetch as much as $350,000 for an 1,800 square foot unit.

But an increasingly bearish market on Wall Street has put a damper on demand for costly apartments in San Francisco, a preferred residence for Silicon Valley executives. And as residential rents stabilize to match lowered earnings expectations among multimedia professionals, the exorbitant cost of purchasing an “artist’s live/work” loft has made these properties almost impossible to move.

Yet, despite the recent economic slowdown, a decade of tremendous growth has put commercial space at a premium in cities that cater to the high-tech industry. While live/work condominiums may no longer be in heavy demand, industrial warehouse space is suddenly in short supply. For developers in San Francisco, this means a rare opportunity to transform warehouse-like apartments into actual warehouses.

“It’s funny, actually,” says Mario Chalstino, a general contractor who has worked on over a dozen live/work projects in the past two years, “because when we started, we didn’t understand why people wanted to live in apartments that look like factories.” Chalstino was one of the first contractors to work on the new loft-to-warehouse conversion projects. For him, business is still booming.

“Now they don’t just look like warehouses,” Chalstino quips, “they actually are becoming warehouses.” For Chalstino and contractors like him, the lengthy and sometimes complicated process of retrofitting live/work lofts as working warehouses can mean big bucks. Although almost all live/work lofts are located in neighborhoods zoned for industrial use, the lofts themselves are industrial only in appearance.

In most cases, the conversion means flooring has to be reinforced and large bay windows must be taken out for added structural integrity. In some instances, car garages are reclaimed as additional work space.

The loft-to-warehouse conversions are also proving an unforeseen boon to the commercial establishments that have plodded along as neighboring businesses were replaced by upscale live/work developments. For many of these local industrial outfits, live/work units meant restrictions on hours of operation, noise complaints and a shortage of parking spaces once reserved for loading trucks.

“You could say that we’re going to miss the new coffee shop,” jokes Angel Garcia, a welder with Giants Auto Body, talking about the new cafe that went up across the street from a live/work unit now destined to become a warehouse for a local clothing manufacturer, “but that wouldn’t really be true.”