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The Top 5 Issues Impacting The Peninsula Multifamily Market

Since the start of the cycle, San Mateo County’s population has grown 7.4%, adding over 50,000 residents, but new housing units have only numbered in the thousands. Developers and cities are building multifamily units as fast as they can, but the region continues to struggle with ongoing issues related to a shortage of housing, strong job growth and traffic congestion.

Sares Regis Group of Northern California Senior Vice President Ken Busch, South San Francisco City Manager Mike Futrell and Bella Vista Development principal Sam Greason

Developers are focusing on building closer to transit to try to alleviate some of the issues in the region, but panelists at Bisnow’s Evolution of the San Francisco Peninsula event Wednesday said emerging challenges are making it more difficult to meet the region’s housing needs. The event not only discussed multifamily trends, but also what goes into planning a campus in the region and why mixed-use projects are becoming more popular.

Check out the multifamily trends Peninsula developers are keeping an eye on below:

Access To Transit

At Bisnow's Evolution of the San Francisco Peninsula held in Burlingame

One way to address traffic congestion is to build near public transit, and many cities, such as South San Francisco, are building up downtowns around Caltrain stations in San Mateo County.

Bella Vista Development principal Sam Greason said during the Bisnow event that his company is building a site five minutes from Caltrain in South San Francisco. He said people don’t want to be just near transit, but also close to various restaurants and retail where they can walk home.

“I call it stumble-home distance,” Greason said.

South San Francisco’s downtown, where much of the new multifamily is being built, also is near jobs at Oyster Point and elsewhere.

Sares Regis Group of Northern California also typically targets sites near fixed transit and rail in the Peninsula that allow people to go to work, Sares Regis Group of Northern California Senior Vice President Ken Busch said.

Busch said in addition to transit, the location and what a downtown can provide in terms of retail and entertainment also is an amenity. The developer is building 260 units in South San Francisco at a former auto dealership site within the downtown corridor.

Competition For Sites

Republic Urban Properties President and CEO, West Coast Michael Van Every and Universal Paragon Director of Development Jonathan Scharfman

While many developers in the Peninsula target transit-oriented sites, not all transit sites are ideal for market-rate development, Republic Urban Properties President and CEO, West Coast Michael Van Every said.

There has been increased competition for prime transit-oriented sites from affordable housing developers that are now receiving additional funding from the state and other means. Other transit stops are isolated and don’t have amenities nearby that are needed to make a market-rate project work, he said.

His company is working on a transit-oriented mixed-use project near the Millbrae BART station that will create 400 units of housing, including 80 units of affordable housing, 150K SF of office, a 135-room hotel and about 42K SF of retail. The project is within walking distance of several restaurants and retailers as well.

It is not just transit-oriented sites that are garnering more interest, but also sites that are being rezoned from industrial to residential.

“In the last 12 months I’ve been working at this, warehouses have become more valuable,” Greason said.

He said there is a 1% vacancy rate for warehouses right now so if costs go up because of additional affordable housing requirements, an owner could reconsider switching an industrial site to residential.

He said discussions with cities on what parts of industrial parks they are willing to convert to residential also are becoming difficult. Companies like Google are leasing space for data centers, which generate more revenue for cities than multifamily.

The Job/Housing Imbalance

Mynd Business Development Wendell Hunter and Universal Paragon Director of Development Jonathan Scharfman

While developers compete with employers and other industries for sites, the job and housing imbalance continues to drive the housing shortage, especially in San Mateo County.

San Mateo County has a 19-to-1 job-to-housing imbalance based on recent statistics from the Housing Leadership Council. From 2010 to 2015, 72,800 new jobs were created, but 2,844 homes were built, according to HLC’s report. An income of about $118K is needed to afford an apartment in San Mateo County.

“There’s a financial disincentive to build housing than to create commercial uses,” Universal Paragon Director of Development Jonathan Scharfman said. “That’s a problem. It’s not going to change any time soon. We absolutely have to do better.”

Scharfman said housing costs are going up and job creators are going to begin to move people to affordable housing markets where there is more access to places to live.

Millennial equity flight is starting to happen as well, he said. His renter base, which are 25- to 35-year-olds, have household incomes of $200K per year and have good tech jobs at companies that are driving local economic growth. But these two-income households are starting to think about going to places like Portland or Austin where they can own and start the equity ladder.

Construction Costs

View Dynamic Glass Senior Director of Business Development Jacqueline Davis

Rising construction costs have impacted the future viability of multifamily developments in the Peninsula.

Busch said construction costs have increased project costs by 20% in the last few years. At the current pricing, 160 units could be built, whereas two years ago, 200 units could be built.

“Costs are going up, but rents aren’t going up to match that,” he said.

He said construction cycles last five years: two years of entitlements, a year to go through processing and another two years to build. So developers and financiers have to believe in the region and that it will all work out because the site is in a good location.

When cities create master plans where they do the environmental impact report ahead of time, it really helps developers and shortens the entitlement process, Greason said. This helps attract more capital and builders because it creates a lot more certainty about what developers can and can’t do.

Greason said one strategy his company has used is to look for projects that can use the state density bonus that allows for additional units and height and provides unlimited waivers if a project includes on-site affordable housing and the developer can demonstrate a community has a need for these units.

He said this can be an effective tool with projects within communities that are reluctant to approve a project. It creates a political cover since state policy trumps local ordinances, he said.

He has used it in four out of five recent projects, he said.

Rent Control

Turbadium co-founder and CEO Scott Harms, Mynd Property Management Vice President of Growth and Business Development Brian Shields and Business Development Wendell Hunter

Rising rents have created a political uproar and a push for rent control statewide, which is a major concern for Bay Area developers. Proposition 10 on the November ballot would repeal Costa-Hawkins, which limits locally adopted rent control ordinances to units built before Feb. 1, 1995. 

“Rent control by its nature sounds goods, it feels good, but then you start to apply the reality of the economic incentives that go into housing and how housing gets built, and we’ll just be stopped,” Van Every said. “It’s just that simple.”

The Bay Area is now the 19th-largest economy in the world, but major cities have some of the largest economic disparities, Van Every said.

“It’s creating this backlash politically not too dissimilar with how our forefathers dealt with Prop 13 and we all know that didn’t turn out very well for land use,” Van Every said. “I fear Costa-Hawkins and other ballot-box planning are going to drive some very bad decisions.”

Van Every said building mixed-income development is the answer, not rent control. Even though below-market requirements can be challenging from a construction and financing standpoint, they work in creating more affordable housing.

Greason said affordable housing requirements should be implemented similar to how Oakland’s affordable housing fees are being done. Oakland has set a schedule of how much the fees will go up over time instead of adding a set fee overnight. He said the fees have softened the market, but not killed it.

“If cities go from zero to 15% or zero to 20% immediately, I think what they find is they end up killing the goose that laid the golden egg,” Greason said.

Cities then get the exact opposite of what they wanted, which was to provide reasonably priced housing, and rents just keep going up, he said.