The Quest for Affordable Housing Continues
Our little company has chosen to live and work in one of the more expensive housing markets in the United States. San Francisco is blessed with a Mediterranean climate, a spectacular natural setting, a truly international flair, great recreation and lifestyle choices, and a concentration of highly educated workers, making the Bay Area a perineal favorite for new business development.
With that success has come problems, not the least of which is housing affordability, an ongoing problem for at least the thirty years we have been working here. With the economic recovery nationwide, and the explosion of the tech industry, major cities throughout the country are experiencing the same pain (see Wall Street Journal article http://on.wsj.com/2aV39Nl). The problem has become more acute, and it is no longer merely low wage earners that are impacted, but teachers, public servants, and a broad cross section of families that in most communities would be considered solidly middle class.
As the Journal article describes, one potential solution has been ‘up-zoning’ which increases density in existing residential neighborhoods while trying to keep as much as the existing neighborhood fabric as possible. Vancouver, British Columbia started experimenting with ancillary, non-conforming housing units years ago with positive results. San Francisco recently passed measures that would allow for an extra three stories of height on multifamily developments if the building is 100 percent affordable. The existing guideline is all development in excess of a certain number of units has to be 20 percent affordable, either inclusionary or ‘in kind’ on another site. Under consideration is a measure to raise the threshold to 30 percent. Also under consideration, but fortunately abandoned, was a 1.5 percent payroll tax on tech employers.
We obviously welcome any and all ideas for affordable housing, just like we welcome ideas on the homeless issue. However, it is critical to be aware of the potential spectrum of unintended consequences. The 1960’s solution of clusters of multi-story, 100 percent affordable housing proved to be miserable failures, creating pockets of poverty and crime. Similarly, we are concerned about the prospect of fixed, and increasing, percentages of required affordable housing for new construction. It will have a blanket impact of increasing either rents or purchase prices of fee simple ownership on the remaining units, and one has to question if what amounts to a targeted tax on the buyer/renter is a fair solution? According to many in the building community San Francisco already has the most difficult and expensive permitting and planning process in the country. (A personal note: a planned kitchen remodel was going to take + 6 months in plan review and fees approximating $30,000, or approximately $385/sq ft in fees for what amounted to an 85 sq ft expansion, independent of construction costs. We elected to pass.)
Here is an example of the impact of increasing the affordable housing threshold locally from 20 percent to 30 percent... The average one-bedroom apartment in San Francisco is @ 620 square feet and currently (mid 2016) rents for +/- $3,700/month, or +/-$5.95/sq. ft/month. If new construction is required to provide 20 percent affordable housing, and to try to recapture the cost of that subsidy, say at a 50 percent level, then half of the lost rent has to be shared by the remaining units, burdening each of the units with 124 square foot of the lost rent (124 X $5.95 X 50%) equal to @ $370/month in rent burden. Increasing that threshold by 50 percent would bump the rent subsidy to nearly $550/month, or a total burden over the existing average rent of 15 percent. Thus, either the developer of new product must charge above market rates or be willing to take a risk adjusted return below industry standards, which also means he probably can’t get financing.
Our belief is that blanket fixed percentages makes many much needed housing options unfeasible, and discourages innovative alternatives to much needed housing. There are physical locations within any urban location that can absorb high percentages of inclusionary affordable housing, and others that can absorb none. A rational approach would include a cost based approach driven by location, as well as some consumer research as to the core needs, and profile of, the consumers who need the housing. At least in San Francisco, the determination of eligibility for affordable housing is based on household income, without consideration of family composition. A needs analysis of affordable housing is currently being commissioned. It will be interesting to see the results.