Two Solutions For San Francisco’s Affordable Housing Crisis
Oct 22, 2020
This week, Mayor London Breed announced new process improvements to speed up the approval of affordable housing, stressing the importance to get more affordable housing projects in the pipeline to curb the high cost of living in San Francisco and to spur the economy during the pandemic.
While no one will deny the City’s need for more affordable housing, nor the fact that the development of affordable housing would lead to more jobs– these statements are not based upon the economic realities of what we are experiencing today.
First, any development project of any kind that is not in the planning and permitting process currently will take at least 2-3 years to complete. Overall, true affordable housing projects are also not profitable and therefore rely mostly on subsidies to be created. As a result, creating a viable financial package for any affordable housing project offers even more challenges and therefore more delays.
We need to jumpstart our economy NOW, not in 2-3 years. Here is how we can address the affordable housing crisis while also creating jobs.
1. Temporarily Remove Rent Control Until The City’s Vacancy Rate is 10% or Less.
Right now, multi-family vacancies are pushing upwards of 20% by the end of November. Landlords are offering incentives like free rent for the first 2-3 months in order to effectively lower initial rents while maintaining the higher rent necessary to protect the value of their investments. However, for people to once again want to move back to San Francisco, the rents need to be far lower, thereby creating true affordable housing now. The challenge is that landlords can’t lower the actual rents because if they do, then new rent rates become the new base for rent control for that unit.
For instance, if a unit was once rented out for $4,000 a month, it’s real market value today is only $2,000 a month. Under current law, that landlord can’t move the rent back to $4,000 a month if they rent it today for $2,000 a month. With rent control laws, they would be required to keep the rent at $2,000, even when the market comes back. This is more than just losing out on an extra $24,000 a year. The real loss for the landlord is the value of that loss as a percentage of a cap rate evaluation. Based on a 5% cap, the real loss of just that one unit to the owner will be $480,000 a year and $5,616 dollar a year in property taxes to the city– if the city is forced to reassess the value of the property because of lower rent. This is just one unit. Magnify this by how many units are currently vacant and you will quickly realize the financial cliff that property owners will be falling into if rents did drop by these levels.
The answer to stopping this is to create an emergency measure to remove rent control temporarily until either the end of the pandemic or when rent vacancy drops below 10 percent.
2. San Francisco needs to remove the affordable housing unit requirements (BMRs) from all residential projects so construction can start immediately.
The current number of units required by developers to meet affordable housing requirements was already holding back several residential projects prior to the pandemic. Now, with these requirements still in place, it makes absolutely no sense for anyone to build units in San Francisco. Once again, the City could use emergency measures to eliminate the BMR requirements altogether, with the contingency that the building owner must agree to start their project within the coming year.
By adding this time constraint and removing the BMR requirements, building owners will more likely be willing to take on such a risk in order to develop in the City. San Francisco would get more housing built quickly and during a time when the market is soft, therefore rental rates would have to be competitive. These units would be protected by the emergency rent control removals, so developers could move rents up to justify their investment at a later time.
These are two very easy solutions that would create real jobs now while providing true lowering of rental rates for the foreseeable future. All it takes is for Mayor Breed and the Board of Supervisors to agree. We CAN create jobs and lower housing costs without the need for overregulating.
Written by: Hans Hansson
Hans Hansson is President of Starboard Commercial Real Estate. Hans has been an active broker for over 35 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, hanshansson.com.