Bad Timing for San Francisco
While housing advocates celebrate California’s new laws to boost housing production, San Francisco activists will have to wait a few years to see results. It’s a case of bad timing. Had these housing bills passed from 1995-2018 San Francisco would have exploded with new homes.
But times have changed. Builders (and more importantly lenders) don’t see San Francisco having the high housing demand of the past. This plus high construction costs will delay San Francisco’s taking full advantage of the state’s new production incentives.
I wrote a story in February, “Is San Francisco’s New Housing Market Dead?” Outside of affordable housing with a public funding source, that’s still the case.
What will propel the construction boom that still expensive San Francisco needs?
Instill Builder Confidence
Builders see the passage of new laws to encourage housing like Lucy holding the football for Charlie Brown. They read about the laws but until they actually see a project going from start to finish in a changed environment, they remain skeptical.
Small builders (10-30 units) are unlikely to use the many new housing laws tied to prevailing wage. And they are more impacted by rising construction costs. Considering that small builders have more flexibility in choosing lots, their absence from the market will be noticeable.
If builders believed they could make money San Francisco would not have tens of thousands of entitled units not under construction. Some of the most high profile, like the thousands of units approved at Parkmerced in 2011, are long delayed. The One Oak project pictured above went through a huge number of hearings and revisions and even after getting everything the builder asked for it has stalled.
Some entitle projects with no intention of building. Their plan is to sell an entitled project. But when the music stopped with the pandemic, far fewer buyers remained.
Why should an investor buy land and go through the development process when they can buy entitled projects and break ground immediately? Particularly when the price of entitled projects keeps falling?
San Francisco is paying a price for its long history of hostility to builders. In Generation Priced Out I describe this history and how some builders feel the city treats them as “criminals.” Builder perceptions of the city’s attitude have not changed with the passage of new state laws.
Revive Demand
San Francisco faces a scenario that has not occurred in the city since the mid-1970’s—a lack of tenant and buyer demand. Apartment and office buildings are selling for lower prices than a decade ago. With an estimated 150,000 fewer Downtown workers than pre-Covid this means a lot fewer people are looking to buy or rent housing in San Francisco.
Some of the stalled high-profile developments are in areas along Market and Van Ness that have seen a sharp upsurge in drug dealers, users, and problem street activities. Last week’s story on the fabled NEMA project having its market value cut in half will further discourage new building in the area.
We could increase tenant and buyer demand in that area by making the city’s streets safer. I’ve written about how open air drug markets worsen the city’s economic decline for years but the area around Market and Van Ness has if anything gotten worse.
I see a parallel between the steady closure of longterm restaurants in San Francisco and the reduced housing demand. Both are driven by the sharp decline in those who once worked in downtown offices five days a week.
Downtown San Francisco is too attractive to remain under-utilized longterm. And Oakland’s crime problems may encourage former San Francisco residents to return. It would be great if the city figured out how to build tens of thousands more homes before demand again skyrockets but that’s not how the local real estate market works.
Build, Build, Build
Even builders eager to break ground are held back by the inability to obtain financing. Until lenders see a return of demand they are not funding new projects.
But at some point San Francisco’s workforce will return. And that will require what the city has long needed: a housing production boom across the city that finally brings down rents and home prices across the board.
I don’t know if this happens in time for the city to meet its 82,000 requirement under the state Housing Element. But when demand returns the city will need far more than 82,000 new units to meet the housing needs for its middle and working class.
