The Good News And Bad News For S.F. Multifamily
After years of multifamily construction, 2017 could be the beginning of a slowdown. Rising rents, high construction, a plethora of fees and a short-term lack of absorption could sideline many multifamily projects in San Francisco. Bisnow spoke with two multifamily experts to find out what to expect this year and how they are addressing the affordability crisis.
Emerald Fund principal Marc Babsin said there will be a lease-up battle this year, since several thousand housing units were created and delivered within the last two to three years. For the short term, the new supply arrived in greater quantity than can be quickly absorbed. This means new apartments are offering significant concessions. He said one property is now offering eight weeks free on a 12-month lease.
“With another 3,000 to 4,000 units being delivered in 2017, I would expect to see more of the same,” Babsin said.
Rising interest rates could stall new residential developments at least in the short term, Babsin said. Prohibitively high construction costs, expected to rise 5% to 6% this year, will also slow down new development. New developments also face significant fees, including a 25% below-market-rate inclusionary requirement, transportation impact fees, graywater treatment, better roof requirements and transportation demand management.
“It’s becoming increasingly difficult to find a project that pencils,” Babsin said.
After projects are completed in 2017 to 2018, there will be an imbalance between supply and demand and rents will go up again, Babsin said.
Emerald Fund completed 418 units at 100 Van Ness in January 2015 and 162 units at The Civic last January. Another 420 apartments at 150 Van Ness (above) are expected spring 2018. In total, these developments bring 1,000 units to Civic Center.
“By replacing wind-swept surface parking lots and outdated office buildings with over 1,500 residents, we are helping to reshape this former back-office district into a thriving 24/7 neighborhood,” Babsin said. “It’s been an amazing transformation to witness and be a part of.”
Emerald Fund is looking for new projects that will potentially be built and delivered during the next cycle, but a shift needs to occur with the high construction costs, high fees and declining rents, Babsin said.
“I would be surprised if we completed any new projects before 2022 or 2023,” he said.
A Solution To The Affordable Housing Crisis?
Panoramic Interests owner Patrick Kennedy (above center with Panoramic Interests director of development Zac Shore on left and CFO JP Walsh) told Bisnow his firm is focusing on micro-apartments and is taking on housing units for homeless people. The units typically are steel prefab modular units of about 160 SF each. Kennedy said Panoramic Interests is looking for sites where it can build at least 100 units at a time.
“A trend toward micro-apartments is a natural reaction to the high cost of land and high cost of development in these highly desirable urban areas like San Francisco and Oakland,” he said.
He said they are focusing on entry-level housing alongside affordable design to do it well. The units are self-contained and have a bathroom. There is a lobby with common areas. His goal is to provide upward of 10,000 units for homeless individuals throughout the Bay Area and Los Angeles.
Once these units are built, they can be leased to the city for about $1k/month, furnished. Homeless and veterans often qualify for assistance and affordable housing so funds could be used to help homeless people receive apartments such as the ones Panoramic Interests is building.
To lower the cost of construction, Kennedy's firm is using prefab and building components off-site. Standardizing design and building the same studio 100 times also decreases costs.
He said unless the industry and cities adjust how developments are done, homelessness will get worse. Anti-development attitudes of cities, residents and politicians aren't helping.
Kennedy said he’s concerned about interest rates and cities doubling set-aside requirements, which make many projects infeasible. San Francisco is now at about 25%, making each unit cost an additional $150k.
“The cities’ burden of affordable housing can’t be placed solely on the backs of producers of housing. It has to be borne by the community at large,” Kennedy said.
Want to find out more? Join Bisnow Jan. 18 at our San Francisco State of the Market event at 101 California in San Francisco.