activity stopped for about 4 to 5 years during the recession that started in 2008. A lot of construction companies
went out of business or the owners decided to trim their workforce, and as a result, there was a reduction in
firms with sufficient numbers of skilled labor to respond to the sudden demand. Since then, the Bay Area has
experienced an unprecedented demand for experienced contractors, but because you cannot suddenly form
a company with a specialized labor force, development costs have gone up. We have seen rents stop rising
currently as the inventory of new units are filled; however, given that the pace of production is slowing due to
high costs, it is a little hard to predict what will happen in a few years.
How does SF (and the Bay Area) tackle the affordable housing
issue?
I think two things would help the affordable housing issue:
1. Offer incentives similar to New York City. NYC permits abatement of property taxes if a certain number
of developed units are affordable. Since half of our operating costs are property taxes, it would be feasible
to build more affordable housing if an incentive like that is offered here. Further, because the tax abatement
would only be for the incremental value of the new projects developed, which may not otherwise have been
developed but for this abatement, there is no erosion of the existing tax revenue funding other critical civil
services.
2. Changing mindsets that middle-income housing is one type of infrastructure. If we build more housing
for middle-income residents such as teachers, firefighters, and others who service a city and keep the rents
at 20 percent below market, then, you would never have vacancies. Your return on investment would be
comparable to treasury bills and your investment would also have a comparable low risk profile. We need
to rethink how we invest and have a lower expectation on return on investment from real estate rather
than saying real estate has higher returns because it is volatile. We can use the same low cost capital
invested in government bonds for infrastructure projects such as roads, bridges, and also invest in human
infrastructure necessary for our society to function, which is middle income and workforce housing. This
allows for a market return (not a subsidy) for the same capital on a risk-adjusted basis. n
Jackie Matsumura is a partner and the real estate industry group co-leader at BPM. Contact Jackie at [email protected] or
925-296-1035.
BPM Real Estate Insights
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