At a time when it’s more pressing than ever for San Francisco to build new housing, the city is rounding out one of the worst production years on record.
Through October, the latest month for planning data, the 2023 tally is just north of 1,200 new homes, a pace well short of the roughly 2,900 homes built in 2022. The two previous years, 2020 and 2021, produced an average of 4,550 homes.
In other words, an already small output has slowed to a trickle, even during a year when city lawmakers — some reluctantly — made sweeping changes to SF’s home-building goals and began overhauling rules that govern approval and construction.
It all started in January when supervisors put in place a new Housing Element, a blueprint meant to make space for more than 10,000 new homes a year through 2031.
All the changes — and more to come — are supposed to tempt builders to build. They’ll start to take effect next year. Until then, the anemic output comes down to economics, says SF’s acting director of citywide planning Joshua Switzky: “If you lose money on every unit you build, building more makes you lose more money.”
Sources like the real estate firm CBRE have for years estimated that SF has the highest construction costs in the world. Switzky points out that most projects currently under construction fit into a few categories: those with contracts already in place; large projects that can start first on infrastructure, such as power and sewer upgrades, and hope that markets are stronger when it comes time to build actual homes; and subsidized affordable housing, which to a degree is insulated from market woes.
Lower rents are also blunting developer enthusiasm. They’re still some of the highest nationwide, but SF’s 4.2 percent drop from 2022 is one of the largest year-over-year declines in average U.S. market rents, according to ApartmentList. (Note that market rents are distinct from actual rents; see here for the difference.)
“Even though prices are high, developers aren’t necessarily pocketing disproportionately large margins,” ApartmentList economist Igor Popov tells The Frisc via email, noting that in SF, variables like “high uncertainty, long approval delays, navigating [environmental] lawsuits,” and more can cut into bottom lines.
A 4 percent dip in rents may not be all that discouraging for builders in some cities, but SF’s high-risk, high-reward development world requires rewards to remain very high. Otherwise, developers will delay breaking ground during lean times like these, and in some cases give up on projects years in the making.
“We think rents will rise, we think costs will come down” over time, Switzky adds. But nobody can know when.
Larger macroeconomic issues are also squeezing the pipeline. “The whole country is facing a lost year of housing production from high interest rates,” says California YIMBY spokesperson Matthew Lewis, noting that the Fed’s inflation-fighting measures have chilled home buying, making this an unattractive time to generate new homes in the country’s most expensive market.
While SF cannot control macroeconomic trends, it can chip away at the fees and red tape and reduce some costs. The big changes underway are supposed to do just that, but it might be cold comfort for projects already deep into the pipeline.
Narrow pipes
There are 72,000 units in progress, according to the SF Planning pipeline report. Less than 10 percent, or 6,667, are under construction. Another 3,313 have permits but haven’t yet broken ground.
It’s hard to say how many of these, or anything else in the pipeline, will come to fruition. Much depends on SF’s large project sites that move ahead — or not — in stages, like Treasure Island, Parkmerced, and the beleaguered Hunters Point Shipyard.
More than 40 percent of the pipeline (31,000 units) are in the sections of these huge sites that have not yet filed for permits. Even if they gain permits and break ground, they can take years or even decades to complete.
Take the long-delayed example of Parkmerced, in the city’s southwest corner. A developer got the green light in 2011 to overhaul the 1940s-era development and build some 5,700 units. They have yet to break ground.
Other huge projects like the Shipyard and Treasure Island have delivered hundreds of new homes, but that leaves many thousands still to come in the misty future. (The Navy’s controversial cleanup at the Shipyard continues to haunt the prospect of fully building a new neighborhood there.)
The long-awaited Potrero Power Plant project finally kicked off construction of its first homes in October, but of the planned 2,600 units, only 105 are presently under construction. (Mayor London Breed and Sup. Shamann Walton said their new city financing program approved in March, which allows large projects to fund some work by borrowing against future tax revenue, sped up the process.)
Just up the shoreline from the Potrero Plant site, Pier 70 signed several new leases to businesses this year, but hasn’t started building the 2,500 homes that are also part of the plan.
An enormous park is underway in India Basin, but the 1,200 or so homes proposed for the area are still to come. At Mission Rock, more than 280 homes were finished this summer, and an SF Port spokesperson tells The Frisc that a second building with about 250 homes should be ready by next summer.
A representative for the development firm Lennar, which has a hand in multiple large SF projects under construction, declined to comment on production timelines, citing “quiet period” regulations.
The affordable plan
Of the 72,000 projected units in the pipeline, about 15,400 are deemed affordable. This falls well short of the roughly 46,000 affordable units the city needs to plan for by 2031 to fulfill its state-mandated blueprint.
SF has promised to make room for an annual average of 5,700 affordable units for the next eight years. About 2,700 hit the market in 2021 and 2022.
But just because units are affordable doesn’t make them cheaper to build. There’s no discount on the cost of materials and labor, and while subsidies help cushion against market forces, they aren’t immune to them.
Big chunks of affordable home funding come from public sources. SF can only provide so much (about $1 billion in the past five years), which means state dollars and tax credits are crucial. Yet competition for those funds are already fierce; project delays can separate winners from losers. “State funding is dependent on projects breaking ground and finishing construction within established timelines, so projects that are ‘shovel ready’ are better positioned for funding,” says Mayor’s Office of Housing and Community Development spokesperson Anne Stanley.
And those funds might start shrinking, as California and SF tax bases are quickly eroding. Many fingers are crossed that SF and California voters, even as budgets tighten, approve big state and local housing bonds next year.
“We’re all just waiting to see what’s happening,” says Li Lovett, director of communications for the Council of Community Housing Organizations. “We’re impacted by interest rates, we’re impacted by the limitations of low-income housing tax credits that are available at a local level and have become increasingly competitive, we’re all still feeling that pandemic malaise.”
That said, the big changes afoot to SF’s planning codes are also designed to ease regulatory and financial burdens on affordable construction — a point that sometimes gets lost in the ongoing drama between City Hall and state regulators.
Next month, city planners will likely present a rezoning of some of SF’s sleepiest and most staid neighborhoods, particularly on the west side. If approved by the Board of Supervisors, the new map could pave the way for small and midsize developers to turn underutilized west side parcels into new homes.
Which means we should steel ourselves for more fights. Sup. Connie Chan, who recently opposed a package of streamlined regulations by arguing that SF was already building plenty of housing, sent out a newsletter this week alerting constituents to proposed zoning changes in the Richmond. (She also repeated misinformation about the number of vacant homes in the city.)
In any case, it will probably be years before these steps start to pay visible dividends. But until San Francisco discovers an economy that doesn’t suffer booms and busts, something the city has never been much good at, it must plan for the next boom. To assume the current negativity — the Covid exodus, the doom loop, the work-from-home wave — will continue indefinitely is bad planning. “The housing market is not just going to combust,” says Lovett. “Multifamily homes are really where it’s at.”
People want to live here, and the city needs housing that everyone can afford.