Despite Ongoing Demand, Building Affordable Housing In The Bay Area Remains Very Difficult
The affordable housing crisis has existed in California and the Bay Area for decades, but has become a pressing problem in recent years. Job growth in the Bay Area has been off the charts, but not enough housing has been built to keep pace with job growth even as more people want to live in area cities.
In the past 20 years, more people, companies and workers have moved back into urbanized areas of San Francisco, Oakland and San Jose, AGI Avant CEO Eric Tao said during Bisnow’s Bay Area Affordable Housing event Thursday.
“Everybody wants to be in cities,” Tao said. “That has really driven the affordability crisis in the areas that we build.”
During the San Francisco event, panelists discussed their affordable housing projects, why it is so difficult to build affordable housing in certain cities, potential solutions to the affordability crisis and the potential impact existing policies could have on the affordability crisis.
Eden Housing President Linda Mandolini said the crisis relates to big structural issues across the state. She said it is a lot easier to approve other commercial development since cities have more incentive to build commercial than housing.
Many cities just plan within their borders and don’t consider what goes on outside the city, she said. For example, Cupertino allowed Apple to build its headquarters the size of the Pentagon without any requirements for housing mitigation.
MidPen Housing Corp. President Matt Franklin said in Silicon Valley there were 6,500 jobs created in 2015, but only 5,000 units. He said the creation of every high-paying job typically leads to the creation of four to five service-level jobs.
In Silicon Valley one of the biggest issues is a lot of the wrong kind of housing is being produced instead of what is needed to match the jobs. Of the 5,000 units built in 2015, only about 800 were subsidized.
“We just have a lot of the wrong people living in those houses,” he said. “Seniors are holding onto a lot of homes and are overhoused with four to five bedrooms … because of the tax structure.”
Franklin said Prop 13 created an incentive for homeowners to stay in their homes and not move out, which would have provided opportunities for other demographics to get housing. Prop 13 was passed in 1978 and limited property tax increases for homeowners until the property was sold.
Improved transit such as high-speed rail where commutes could be 30 minutes would relieve some of the pricing pressure, he said. Mandolni said transit-oriented development can be one of the solutions and Bay Area Rapid Transit and Santa Clara Valley Transportation Authority are among the agencies pursuing more transit-oriented developments near stations.
Segment Faces Lack Of Funding, Resources
One of the biggest issues is capital is mainly chasing high returns, but returns just haven’t been high enough in recent years, especially when it comes to creating middle-income housing, Tao said.
There have been 30,000 units approved in San Francisco that can’t go forward because of the high costs to build, he said. Five years ago, construction costs were about $250K/unit, but now are about $500K/unit, Tao said.
There is a ton of money out there willing to invest, but the returns just aren’t there, Tao said. If investor groups had a different mindset and viewed middle-income housing more as a fixed-income return and safe investment with a low yield of about 3% to 5%, then it would result in more middle-income housing, he said.
“I would start to think of middle-income housing as an infrastructure of our economy,” Tao said.
The state and local jurisdictions have been pushing toward creating more funding and resources for affordable housing.
Tao said California State Assembly member David Chiu is pushing for a property tax exemption for properties that are building up to 120% area median income housing. The exemption is currently at 80% AMI.
Mandolini said local municipalities also don't have enough resources. After redevelopment ended, $1.5B for affordable housing went away on a local level. Santa Clara, Alameda and San Mateo counties have all passed ballot measures to create a new level of housing funding.
Mandolini said it is not just the money challenges, but planning and approvals are equally challenging.
“It’s really hard to get communities to vote yes for this work,” she said.
In smaller communities when 200 neighbors show up against an affordable housing project, it’s more painful for council members to vote yes, especially since these council members want to be re-elected. It has been easier to build affordable housing in places like San Francisco where there are nearly 1 million people and 200 people can’t sway someone’s chances of re-election, she said.
Challenges To Preserving Naturally Occurring Affordable Housing
Jonathan Rose Cos. Managing Director of Acquisitions Nathan Taft said preserving existing stock near transit can be beneficial, but it is not always easy and purchasing properties is very competitive. In 2017, Jonathan Rose Cos. bought all of Forest City’s affordable housing assets for $500M. The company has some projects in the East Bay and is working on deals in San Francisco.
Purchasing existing buildings can be more expensive than building new, Franklin said. There are more credits and funding incentives to build new instead of buying and preserving existing stock, he said.
“It’s more affordable to build than to buy,” Mandolini said. “There are not enough resources to build and we’re desperate to build.”
The need to preserve existing stock is there, and cities are looking for anti-displacement strategies that aren’t rent control, he said. Often, investors purchase older properties and jack up the rents, emptying out buildings within months instead of committing to a gradual increase that doesn’t drive people out over time.
He said San Mateo County, which has been all for preserving existing stock in the past, has put its program on the shelf because it is more expensive to buy than to build.
“As the market turns, it could be a big part of the solution,” Franklin said.
Eden, along with several other affordable housing developers, formed a Housing Partnership Equity Trust REIT nationally to buy properties coming off tax restrictions. Eden and HPET have bought some properties in Sacramento as well.
“Acquisitions have to be part of the toolbox,” Mandolini said. “We don’t have enough robust capital in either space to move the meter.”