Tech Giants May Not Be to Blame for Bay Area Housing Shortage

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Tremendous growth by tech companies over the last few years has added more high-salaried tech workers to the Bay Area housing market, pushing up pricing of existing housing and encouraging developers to build more luxury apartment units. Meanwhile, those households with an average income of $100,000 or less are being priced out of the area.

As a result, California Governor Devin Newsom called on tech companies to help solve the state’s housing crisis, but that’s probably not the reason Apple, Facebook, Google, as well as Salesforce CEO Marc Benioff and his wife Lynne, have pledged a total of more than $5 billion to fund below-market-rate (BMR)—workforce and affordable—housing projects. An income of $114,000 or less qualifies for BMR housing in the Bay Area.

The move is both an attempt at ethical practices and a strategic business decision, as these companies are concerned about retaining human capital, and low housing affordability threatens workforce retention, notes San Francisco-based Peter Yorck, director of the multifamily investment advisory group for Northern California with real estate services firm JLL.

“The high cost of housing is not the fault of tech companies, who provide good-paying jobs,” says Peter Conte, vice president of the consulting group with real estate services firm Transwestern in the Bay Area. Tech companies are doing this because “they recognize that they exist in an ecosystem that relies on a robust housing system,” he adds.

Over the last eight years, the Bay Area added 676,000 jobs, but only 176,000 housing units, reports the Bay Area Council, a business group composed of executives from top Bay Area companies formed to solve the region’s most challenging issues. Statewide, 3.5 million housing units are needed by 2025 to meet pent-up demand, according to research from the McKinsey Global Institute. The state is now 49th nationally for housing units per capita.

In discussing Apple’s commitment to affordable housing last month, Newsom recognized that the housing problem solution is a matter of numbers. “The sky-high cost of housing—both for homeowners and renters—is the defining quality-of-life concern for millions of families across this state, one that can only be fixed by building more housing,” Newsom stated.

Apple pledged $2.5 billion to the cause, earmarking $1 billion for an affordable housing investment fund, $1 billion for first-time homebuyer mortgage assistance, Apple-owned land valued at $300 million for affordable housing in San Jose, $150 million for a Bay Area affordable housing fund and $50 million for homeless programs.

Earlier this year, Facebook also committed $1 billion for affordable housing projects, dedicating $250 million to a partnership with the state of California to develop affordable housing on state-owned land,  $150 million for developing affordable housing in the San Francisco Bay Area, and $225 million to developing 1,500 mixed-income units in Menlo Park, Calif., Facebook’s corporate home. Another $350 million was set aside for potential additional commitments to those initiatives.

Of Google’s $1-billion commitment announced last summer, $750 million will be used to convert Google-owned land zoned for office space to 15,000 BMR units and the remaining funds will provide developers incentives to build 5,000 more affordable housing units.

Despite these companies’ plans for funding, Yorck notes that, “It’s unclear how, where, when and what exactly the funding will be used for.” There is uncertainty around actual funding allocation to build housing units and over what period of time that will occur, noting that the biggest housing deficit is in rental units.

What’s more, while the tech giants have pledged the funding, there is no legal obligation for them to actually provide it, according to Conte. And while he commends their commitments, Conte says the funding will have minimal impact on the housing shortage in the Bay Area because lack of funding for housing is not the chief issue. Rather, the problem is San Francisco’s onerous, bureaucratic approval process and high cost of construction in the Bay Area overall, which makes multifamily projects difficult to pencil, he notes.

A former loan officer at Wells Fargo who worked with housing developers, Conte says that San Francisco’s project approval process takes twice as long as it did a decade ago, the BMR requirement has jumped from 11 to 33 percent over the last few years, and just recently the city raised development fees by 143 percent. Meanwhile, building costs in the Bay Area have skyrocketed and are now the highest of anywhere else in the nation, he notes.

“It’s the mouse chasing its tail,” Conte says. “Developers must rely on two-thirds of a project to make money, so the only projects that make sense are luxury units.”

“There needs to be an effort to make the process easier, more economically feasible and less bureaucratic,” agrees Yorck. “Aside from the escalating cost to construct, another part of the issue are the increasing fees added by cities, thereby making projects unfeasible.”

The prevalence of NIMBYism (not in my backyard) is another hurdle for housing developers, as local opposition to new projects delays the already overly long approval process or kills projects altogether. “It’s black and white: everyone is in favor of building more housing, just not in my neighborhood,” Yorck says.

In fact, a report on the causes and consequences of the high cost of housing from the state’s Legislative Analyst Office cites local resistance to dense housing development as one of the main reasons for California’s housing crisis, especially in affluent coastal neighborhoods, where land use decisions are often made by voters.

For example, Conte cites a recent ballot measure on a large-scale high-rise apartment project proposed for the San Francisco Bay, which was rejected by voters. Another example is the resistance to housing development in Encinitas, an affluent coastal city in San Diego County. The state’s Housing Element law, which requires cities to provide housing affordable for all income groups, failed to move voters there to approve a ballot measure that would allow high-density and affordable projects in certain areas and put the city in compliance with state law.

Encinitas has been sued by developers in the past for its handling of the state Density Bonus program, rounding down calculations rather than rounding up to limit the number of units allowed. The density bonus program allows developers to build higher-density projects than zoning permits when they include a certain number of affordable units.

In conclusion, Conte says, “It’s the ton of demand and limited supply that is causing pricing to go up.”

Apple’s plan to provide down payment assistance and low-cost loans for homebuyers might have the opposite effect than is intended, he notes, as it will increase demand for a limited supply of housing units, which will drive up pricing in the market overall.

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