By: Ruby Bolaria, Research Analyst
It comes as no surprise to anyone in the Bay Area that we are in a housing crisis. San Francisco in particular is experiencing a massive housing shortage leading to a deficit of affordable options. Among other factors, there are structural forces partially responsible for restricting the supply of housing for decades – before San Francisco ever became a technology industry hub. There are three main factors that have created San Francisco’s current housing real estate situation:
• High demand from population growth
• Dismal housing supply
• Swelling employment
Population Growth: From 2010-2013 San Francisco added 32,000 people and continues to grow. New housing construction has failed to keep up adding only 4,046 net new units within the same time period. Although new construction boasts 6,733 new units currently underway, this is simply not enough to satiate the current demand to live in San Francisco. Currently, 50,556 residential units are in the entitlement process or are under construction in San Francisco. Should the entire pipeline break ground, San Francisco’s housing stock would grow by 13.3 percent. However, 51 percent of the pipeline units are from Bayview/Hunter’s Point/Candlestick, Park Merced and Treasure Island projects which are still in their infancy and will not deliver for several years. The entitlement process itself is arduous and does not guarantee approval, therefore it is likely that some of these projects will never break ground.
Housing Stock: Much of the current housing construction is considered luxury housing, which meets the demand of wealthier San Francisco residents. However, the creation of more housing, luxury or otherwise would help alleviate demand for the city’s existing housing stock and with average asking rents climbing to $3,400 for a one-bedroom any relief would be appreciated. Rental rates are particularly important in San Francisco where roughly two-thirds of the population rents. There are about 380,000 housing units in San Francisco and about 172,000 or about 45.2 percent are under rent control (SPUR). Under the city’s rent control ordinance, rent on these units can only rise as much as 60 percent of CPI, so these rents are declining in real economic terms. There are merits in preserving rent control units; however, the policy has also created the price differential between market-rate rents and whatever longstanding rent-controlled tenants are paying to spiral out of control. When tenants turnover in rent controlled units, landlords are incentivized to raise rents drastically to help correct the market imbalance or try and turn the units to market-rate to maximize gains.
There are other city regulations, including height limitations and land-use restrictions, that inflate home production creating a wider spread between construction cost and sale price. (SPUR conservatively estimates San Francisco residential construction costs $500,000 for an 800 square foot unit). City regulation on housing production is definitely needed, however updating outdated policies would help alleviate tension on affordability, create more options for residents and increase San Francisco’s ability to be a place to live, work and play.
Employment Growth: The emergence of the tech industry as an economic powerhouse helped to create jobs and increase the population rapidly. The tech industry now employs about 58,000 workers in San Francisco or about 9.2 percent of the total workforce. Tech is fueling San Francisco’s current prosperity and has helped cut the city’s unemployment rate to 4.2 percent, well below California’s unemployment rate at 7.3 percent. This economic growth is translating into to greater economic prosperity for the region. San Francisco now has more employed residents than any other time in history. The tech growth has a spillover effect creating and estimated 1 to 4.3 additional local service jobs for every 1 tech job (JLL 2013 High-Tech report). The exact number varies by study but it is undeniable that a spillover effect exists and helps to create a stronger economy on all levels.
Tech companies need highly skilled and educated workers to maintain their competitive advantage and they recognize the housing shortage is a problem for their bottom line. Salesforce, for example, is San Francisco’s biggest tech employer and growing, leasing over 700,000 square feet of office space in 2014 alone. Their various planned occupancy expansion will translate into an estimated 6,153 new workers, but where will all of these employees live? Additionally, as incomes grow among tech workers, and demand for living in San Francisco continues to rise, supply needs to catch up so all of us non-tech workers can still afford to live the city. Easing barriers to entry on new development will help increase housing supply and help ensure affordability. The majority vote approving the toothless Prop K in November demonstrates at least the strong support for affordable housing in San Francisco. Developers are already making deals to build affordable housing in return for building more pricey apartments and condominiums (Developer may help pay for low-income housing in Tenderloin).
The high housing costs are unhealthy for the city and business alike as both are dependent on constant innovation and talent. As the world becomes increasingly urbanized, San Francisco can maintain its dominance as an economic powerhouse as long as it is able to house its workers. As companies seek to locate or expand in San Francisco, housing is one of the key factors that will influence their decision.