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Polaris Pacific Partner Paul Zeger On Why The San Francisco Housing Boom Isn't Ending Anytime Soon


The tech industry's fortunes have fueled much of San Francisco's housing boom over the past several years, so reports of a startup slowdown have raised concerns among real estate investors. A new Polaris Pacific analysis, however, shows there is every reason to expect continued, steady growth in the city's condo market: inventory levels remain historically low and well below the six months of supply considered the benchmark for a balanced market. Polaris Pacific partner Paul Zeger (that's a trout he's holding—more on that later) believes the new inventory "doesn't begin to address" the current demand. We spoke with him recently on the state of the San Francisco housing market and what the city can do to better address the challenges it faces. 

Bisnow: Many are predicting a glut in the San Francisco condo market, most recently evidenced by the decline in the city's median condo price from Q4 last year to Q1. What would you say to these observers? 

Paul Zeger: There is undeniably new inventory coming to market, but it’s a very small percentage that doesn’t even begin to address the current demand in San Francisco. A decline in median condo pricing in Q1 doesn’t necessarily indicate a huge glut of inventory, but more simply that astronger variety of product is being delivered into the market, including several properties at lower price points.

If you look at the current supply and demand in San Francisco, job formation is massive and the housing supply is not keeping up. When you consider the Bay Area as a whole, what you learn is that there are a few market segments that have adequate supplies of inventory. This creates a constant upward pressure on sales values, which in turn carries all the way through to land prices.

As an example, Oakland has incredible growth in jobs, attracting top employers like Uber. The housing market hasn’t even begun to react—no new substantial properties are under construction—so prices are being driven upward on the limited supply that is now available.

Bisnow: Do you see concerns over the startup slowdown as overblown? Are there any mitigating factors such as growth in established tech companies or other industries? If not overblown, how will you adjust your strategy to account for slower growth in the S.F. tech industry?

Paul Zeger: The nature of the startup culture is that it’s a high-risk venture and many of them are going to inevitably fail. What won’t change for the Bay Area is the concentration of intellectual talent. For every one startup that fails, five people from that startup go out and start their own venture, attracting an infusion of capital into the Bay Area. That helps fuel the intellectual base and will further support the growing demand for housing over the next five years.

Bisnow: Could you explain in more detail what effects the proposed increases to the city's affordability requirements will have on the condo market? Perhaps you could address how only 11% of San Franciscans can afford to buy a median home in the city right now.

Paul Zeger: The need for more affordable housing in San Francisco is unquestionable, but like many major urban cores in the country, the desire to live here is expanding rapidly, causing values to continue to rise. That doesn’t eliminate the need to accommodate all income levels.

Developers that must meet the city’s affordability requirements are still held accountable for creating a financially viable project. With rising construction costs eliminating profit margins, the developer is forced to increase prices on individual residences, which ends up pinning the affordability housing issue on the 11% of San Franciscans that can afford market rate—further exacerbating the issue of affordability. Affordable housing is a citywide epidemic, and one that should be borne by the community as a whole, including the employers who are benefiting from the high-level workforce.

Instead of enacting affordable housing requirements that are largely viewed as penalties by developers, we need to incentivize builders. Lessening parking requirements, offering density bonuses or increasing height maximums—there are a multitude of options that can encourage the development of additional affordable housing. As an example, the new SB 1069 bill would make it much easier for homeowners to build accessory dwell units—or in-law residences—that would provide more housing supply and make better use of the limited space in the Bay Area.

Developers can also be challenged to carefully study the needs of consumers, getting creative to design properties that meet housing needs with more cost-effective products than have been traditionally provided. 

Bisnow: What are the overall greatest challenges you see facing the S.F. condo market, and how will you address them? What would you recommend developers or the city government do to address these? 

Paul Zeger: Creating a sustainable housing market is like catching a prize trout. It takes the right environment, plenty of patience and the skills to know how to set the hook. The biggest challenges facing the San Francisco condo market today are construction costs coupled with the uncertainty of the approval process in local legislation. Even if a project meets all of the requirements the city has laid out for new construction, they can still be denied the right to develop, through the city’s appeal process. This comes after a not-insignificant financial investment in the planning process.  

If there was a more predictable process, developers would feel more confident and they wouldn’t require such a high financial return, as risk would be mitigated. Overall, we remain largely optimistic, as the demand for living in one of the world’s greatest cities is not going to disappear anytime soon.