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Real Estate Reporter

More housing? No thanks; we’re good

San Francisco misses another chance to address the housing crisis
Rome’s Coliseum: Would it look better with a liquor store? Photo: smarkov2

THE NEW ROMAN RUINS OF NORTH BEACH

There is a building at 659 Union Street (between Columbus Avenue and Powell Street) known as the Verdi Building. It used to contain retail and residential units. But a 2018 fire left it a burned-out shell waiting to be redeveloped. Like the Roman Coliseum, it appears that locals prefer a ruin to a usable building.

Efforts to rebuild the building by adding four stories to part of the roof — thus making it in places an eight-story building — have set off the typical San Francisco outrage about the building being out of character or for casting a shadow across a fairly wide street and over part of Washington Square Park. That last bit is being used as the main stick with which  to hit developer Red Bridge Partners, thanks to a 1984 proposition that forces buildings higher than 40 feet to get special Planning Commission approval if the buildings would cast a shadow on a public park. It is a weapon used by any antidevelopment voter, neighborhood group, or politician to stop projects that do what buildings in big cities are supposed to do: rise higher as the most economical and environmental way to do density.

The proposed eight-story development would include nearly 100 units of housing, about twice the amount that would be possible if the building were rebuilt within its current envelope.

After the Board of Supervisors — which is full of members who bleat repeatedly about the need for more housing for city residents — recently voted unanimously to kill another proposed project elsewhere in the city because it would cast a shadow over a nearby park for a minimal amount of time each year, it is clear that the supervisors and their constituents don’t want more housing.

The Coliseum is a historic site, and it is a ruin of great value, having served as a focal point for some key incidents in Roman history. It was awesome architecture, and it is good and honorable to keep it as a ruin.

The Verdi Building had a liquor store.

HOUSING VERSUS OFFICE

In 1986, San Francisco voters passed an anti-office ballot measure called Proposition M that limited the amount of new office space in the city. Proponents said they wanted to prevent “speculators” from building tons of unused office space that would then be left unused in an economic downturn.

Now, the logical fallacy of that is if you hate speculators, the best thing to do is to feed them. If there is tons of unused space during a downturn, guess who gets hurt? The speculators. Guess who wins out? Companies and nonprofits that get cheap office leases during those economic downturns. You know, the companies and nonprofits that were forced out of San Francisco over the past decade because of rapidly rising office rents? Yes, them.

When supply is artificially limited, it is the speculators who win out spectacularly, because when they are allowed to develop, they’re pretty much guaranteed casino rates of return.

This past fall Mayor London Breed floated the idea of upping the cap on office space in the city. But she backed off in early December, right before the deadline for filing to get it on the ballot.

Oh, city of real estate irony, what could have stopped her in her tracks?

There is another ballot measure that would seek to restrict the amount of office space that can be built. Called Proposition E, it is based on the spurious idea that we don’t have enough affordable housing because there’s too much office development. Instead of doing something to demand the city meet its state-mandated affordable housing goals, the measure would restrict economic development and do nothing to spur housing development.

So everybody loses.

SPEAKING ABOUT OFFICE SPACE . . .

The researchers over at real estate firm Avison Young reported that in the third quarter of 2019, overall office rents hit $88.73 per square foot (with class A — the newest and best properties — space going for $90.08 per square foot).

In the near future, “we should expect to see the inverse trend of vacancies declining and rental rates climbing. As San Francisco’s booming economy shows no end in sight, the demand tech companies will place on premium spaces will outpace the limited supply. With traditional tenants moving out and tech companies moving in, the San Francisco office market has undergone a significant demographic shift.”

So do people still think it was a good idea to limit the amount of office space? Those tech companies so many people love to hate are taking up more and more space, and other companies are forced to move out of the city rather than stay here, which they could have done with plenty of supply.

NUMBERS, NUMBERS

O.K., enough picking on the NIMBYs.

Let’s start the new year by looking at some of the numbers about the city’s real estate from the past year.

The median sales price of a house in San Francisco reached a Bay Area-high of $1.58 million in the third quarter of 2019, according to Compass. San Mateo County was in second place with $1.51 million.

When Compass looked at the sales price trends since 2012 in terms of sections of the city, guess which area blew away every other area in terms of median sales price? Yes — the area encompassing Pacific Heights, Presidio Heights, Cow Hollow, and the Marina had median sales prices more than twice as high as the next highest-priced area (which happened to be tony Noe Valley, Eureka and Cole Valleys, Glen Park, and other neighborhoods). If you’re reading this and thinking, My home isn’t valued at $5 million, don’t worry. Our Northside median prices are thrown off by a few of those “most expensive penthouses in the city” stories you see from time to time on SFGate.

MORE NUMBERS

Redfin reports that, no surprise, San Francisco rates among the most competitive housing markets in the country. Our fair city ranked 91 on a 1–100 scale, with 100 being “most competitive.”

Redfin notes that homes here typically get multiple offers, and homes “sell for about 8 percent above list price and go pending in around 21 days.”

And if you still don’t believe in supply and demand, note that Vanguard Properties produced a market report in December that said there were 222 single-family properties for sale in November 2019, compared to 376 in November 2018. Condominium units and TICs were also less available, with only 495 available in November 2019 compared to 642 in November  2018.

PACE SEISMIC FINANCING FAIL

San Francisco’s Earthquake Safety Implementation Program (ESIP) started eight years ago as the result of recommendations for addressing the city’s earthquake vulnerabilities. A key vulnerability is so-called soft story buildings; typically, these two or three story buildings have a ground floor or “soft story” that is indoor parking, retail, or common space in a condominium building.

In a 2014 update, ESIP reported that 111,562 residents — or a little more than 13 percent of the city’s then-population — lived in buildings that were subject to the program, representing nearly 50,000 residential units.

That’s a lot of units requiring the seismic retrofit work. I have heard per-unit costs estimated at everywhere from $10,000 to nearly $70,000.

And this has an admittedly personal angle, because I live in a condo building where, after much consultation and worrying and planning, we are embarking on a seismic retrofit program to the tune of almost $30,000 per unit.

Now, that is an amount of money that a sizable chunk of San Francisco’s wealthier residents can come up with simply by looking between the cushions of their sofa. Others can take out personal loans, second mortgages, or borrow against their 401K plans. Painful, but doable. But for others, none of those options might be possible (in my case, because of an unexpected repair job in 2017 that soaked up all of my resources for loans). In cases like this (or for people who just don’t want to do a traditional loan), the city arranged a public financing option through an existing program known as PACE financing, which is available for risk mitigation, energy efficiency, and water conservation projects.

PACE is not a loan per se. It is paid back through an added fee on your property taxes for terms up to 30 years.

O.K., sounds great, right? Well, in my personal experience this past month, I found that the company currently administering the financing has a requirement that makes it impossible to use for many if not all condominium communities. Condo homeowner associations (HOAs) typically hire and oversee the contractors doing the retrofit. But the current PACE financial company will not pay HOAs; it will only pay the contractor directly.

It is a little difficult to get info about the program from the financiers. ESIP’s website doesn’t even list the current funder, which is something called E3; it still lists the previous funder, Alliance/NRG, a representative of which sent me to E3. As near as I can figure, previous PACE finance companies had different rules. HOAs in the city have successfully used PACE and have been paid by PACE, according to a property management representative I spoke with. So why the change? And why this change — one that literally breaks a no-go rule with HOAs? Why couldn’t the PACE funder simply recognize the HOA as the general contractor, because that’s the entity with the contracts and the oversight of the work that is being done, not to mention the legal responsibility to be in compliance?

At press time, requests for info from two different San Francisco supervisors have gone unanswered. That is not necessarily as heartless as it might seem; my inquiries were admittedly made around the holiday time, when many offices are short-staffed.

Meanwhile: Rock, hard place, and San Francisco homeowners in between.

QUOTE UNQUOTE

“Some markets are clearly positioned for exceptional longer term performance due to their relative housing affordability combined with solid local economic expansion. Drawing new residents from other states will also further stimulate housing demand in these markets, but this will create upward price pressures as well, especially if demand is not met by increasing supply.”

—Lawrence Yun, Chief Economist, National Association of Realtors

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