San Francisco Multifamily Thriving Despite Challenges
It’s no secret San Francisco’s multifamily market is thriving, but challenges are making the penciling of projects more difficult. Developers, designers, contractors and investors gathered at The Fairmont Hotel in San Francisco for Bisnow’s San Francisco Multifamily Forum to discuss some of the issues they face.
Panelists told a 200-person crowd how they are adjusting to a market slowdown and how the affordability crisis is not being solved by recent initiatives. Panelists included moderator and Essel Environmental Engineering & Consulting president Nik Lahiri, Build Inc president and partner Lou Vasquez, Polaris Pacific partner Paul Zeger, AvalonBay Communities EVP Steve Wilson, Emerald Fund principal Marc Babsin, Equity Residential first VP John Hyjer and Woods Bagot regional managing principal Terry Meurk.
After a few years of a seemingly red hot market, some slowdown is visible. Polaris Pacific partner Paul Zeger, above with Veritas CEO Yat-Pang Au, said the upcoming delivery of 10,000 units in San Francisco will create a mild blip on rental rates and a little more competition. People are holding out on spending discretionary funds through the uncertainty of the election cycle. But the rental market is strong and “still getting stronger.”
He said instead of “driving 90 miles per hour, we’ve slowed down to 70 miles per hour, but it feels slow relative to 95.”
Emerald Fund principal Marc Babsin, above, said demand remains strong for his projects, but has slowed. A year ago, he was leasing units at 100 Van Ness at 10 per week. Comparatively, Emerald’s property at Polk and Hayes is leasing up about four per week with one month of free rent. He hasn’t seen occupancy go down, but rent increases are less and there are more concessions.
Affordability Crisis Fixable?
Equity Residential first VP John Hyjer, above, said despite softening, his company is leasing up on pace with expectations, but happy to make 1% to 2% year-over-year rent growth this year after five years of double-digit growth.
He said one of the biggest problems is recent affordable housing regulations “shot in the head 60% of pending projects.”
Build Inc president and partner Lou Vasquez said the affordability crisis is not something fixable and Prop C really made things difficult because “deals just don’t work with 25% affordable housing.” He said more housing needs to be built and to maximize and rationalize subsidies to solve the crisis.
“You should build affordable housing off-cycle when the land is cheap and you’re not competing for land or services,” he said.
Emerald Fund's Marc said developers lose about $800k for one unit of subsidized housing, but you've got to "think you can produce more housing units with that money.”
Polaris Pacific's Paul said with low interest rates, the industry should be building like crazy, but local and federal governments are not locking down money for affordable housing. Affordability ends up on the backs of the market-rate buyer, creating a bigger spread between market rate and subsidized value.
Woods Bagot regional managing principal Terry Meurk said the affordability problem is everywhere, not just in San Francisco, but it’s “magnified here since it’s one of the most expensive places to live.”
He suggested more collaborative partnerships with local planning departments and communities as the first steps to pushing forward more projects.
“You have to know when you’re in San Francisco, it’s a marathon, not a sprint,” he said.
Construction Cost Constraints
Rising construction costs are also making it more difficult to build more housing that could improve the affordability crisis. Costs are high because of increased wages, capacity and workforce, said Nibbi Brothers VP Joe Olla. He said wages have gone up over the last five or six years and materials are more expensive.
He said to also make sure a “contractors' eyes are not bigger than their stomachs,” meaning contractors are not taking on more work than they can complete. He added contractors with good pools of subs are also ideal.
Many projects have been coming up against a shortage of subcontractors. Joe said partnering and bringing on subs as early as possible, particularly on a design-assist basis, ensures the financial credibility and solvency of a project.
Olympic Associates regional manager Eric Smith said he tries to get the builder on the team as quickly as possible. He said there needs to be a better understanding between owners and developers on what is being conveyed during the development process. He suggested finding someone who can find a balance between aesthetic design and economic objectives.
Fisher COO Tom Perko, above with Fisher VP Syndey Fisher Bernier and Sun Light & Power sales manager Eric Nyman, suggested a more cooperative process during the value engineering so the back-and-forth process between subcontractor, designers and owners doesn’t run on for years.
He is working on ways to teach owners about limiting the amount of value engineering and to doing it quickly so the project can count on subcontractors being available to complete the project at cost.