Real Estate Investor

Something’s gotta give: Dr. Peter Linneman on taking the mystery out of our housing crisis

Dr. Peter Linneman. photo: Linneman Associates

About a decade ago, before the Great Recession and the related implosion and rebound of the real estate market, the matter of how to house burgeoning populations was a topic of concern only to a relative few people. Today, with San Francisco housing rents and sales prices reaching new heights, it is a concern to very many people in the city. But like the weather, everyone talks about it but no one does anything about it.

They have reason to be concerned. Rental rates increased by nearly 15 percent over the past year, compared to a national average of about 3.7 percent, according to Zillow research. The Wall Street Journal reported at the end of March that home sales prices here were up nearly 8 percent over the past year, one of the highest growth rates in the country. The twin drivers of an ongoing influx of residents and severely restrained housing supply have served to make San Francisco’s housing prices a challenge for buyers, renters, and city leaders.

But back when only a few were concerned, prominent real estate expert Dr. Peter Linneman noted that with populations continuing to expand (and with California itself expecting to grow by many millions in the coming decades), there are inescapable choices for cities.

To deal with those new arrivals’ housing needs, Linneman said, you can either stack them up (build taller buildings in denser cities), spread them out (converting farmland, woodland, and wetlands into less-dense housing developments), or you can kill them. The last option, of course, was specious, but it made his point that city voters, businesses, and policy makers cannot avoid making a choice between the first two options.

For 33 years, Linneman was on the faculty of the Wharton School of Business. Today, in addition to heading up the Philadelphia-based real estate advisory firm Linneman Associates and serving as chief economist of NAI Global, Linneman does charitable work for overseas children in extreme poverty. The Marina Times slowed him down long enough to ask him for his thoughts on the man-made housing crisis.

In your NAI Global Report for population growth from 2013-30, you wrote about the relationship between stringent regulations and growth rates. Could you explain your thoughts on San Francisco’s regulations?

They’ve choked off growth. Take Silicon Valley — originally nobody moved to Silicon Valley because they wanted to live there; they went there because they couldn’t get where they wanted to be. Now Silicon Valley is its own place. But 35 years ago it was the cheap alternative to San Francisco.

Look at places like Hong Kong. It’s a fabulous place. San Francisco’s not really a dense place when you get down to it. Among dense cities, it’s not a dense city. Hong Kong’s topography is no easier than San Francisco’s. It also has earthquake issues and so forth, and they accommodate massively higher density and people want to live there.

Clearly a market like the San Francisco area is a market that has more restrictiveness in its [development regulations. Despite] the extent that the economy is strong and people start building — there’s not a lot of building going on anywhere, but one of the concerns people have is if these good times continue, I get the curse of a lot of development and if they don’t continue, then I’m screwed. If you want to protect yourself, you want a place where if the good times continue, at least get the benefit out of it.

San Francisco has overbuilt commercial, just later than most markets. The housing there is just ridiculous. People complain about how expensive it is, and yet they don’t let people build housing.

Houston [and] San Francisco are the same size, as a population base. Houston has been a more vibrant economy than San Francisco. But the reason Houston has affordable housing and San Francisco doesn’t is that you can build housing very rapidly in Houston and you can build it pretty dense if you want to. And you can build it “out there” if you want to.

On its face, same general size of population and Houston growing faster, you’d think Houston should be the place with the more expensive housing. But in Houston, if a new family is coming in, they can build a new house. In San Francisco if a new family is coming in, San Francisco allows that they can build a quarter of a house or half of a house. It benefits the people who already have housing at the expense of newcomers.

It’s all about supply and demand, and you don’t have to look for the culprit. It’s all on the supply side. It’s not like there aren’t developers who would like to build in San Francisco if they could.

In the San Francisco area, if I let you build a house in a year, from start to finish, you get your permit and you’re on with it. If I let you do it in a year, it’s a lot less risky for the developer than if I let you take three years, because I can see what it’ll be like in one year [better] than in three years. Sure things look fine now, but by the time it comes online and I’ve sunk all these costs — lawyers, engineering, etc., and I’ve got to wait three to five years to know what it’s like — that’s risky. But in Houston, you can get a home built in nine months from when you decide to build one.

You once said that when it comes to housing growing populations, you can either stack them up, spread them out, or kill them. Do you have any policy suggestions for San Francisco?

You can kill them, stack them up, or spread them out. But if they’re coming, they’re coming.

You’ve got this notion of San Francisco saying we don’t want people to build, even as people complain that they can’t afford to live there. I have a nephew out there who can’t afford to live there, and yet he complains every time they build out there. It’s a fascinating socio-political question.

There’s no mystery to lower housing prices. Just make it easier and faster to build. I stress the faster and the easier for the risk dimension. Risk is huge. It’s really easy for someone else to say “Put up all the study costs and design, and it’ll be fine.” But wait, why don’t you put it up? It’s real money that’s at risk.

If you [raise] the entry fee, fewer people will come. Places like San Francisco have a very high entry fee for housing, and you have to jump through a lot of hoops and entry fees up front. First of all, that entry fee has to be captured eventually, but the extra risk discourages even more so.

I’ve never really understood the political dynamics of it. There are people who make fortunes out of it. They bought in 1975 — nothing special, anywhere else in the country it’s $300,000, but there it’s $1.2 million. They have an incentive to [restrict new buildings].

You now head up a real estate consulting and research firm with major institutional clients. What are those clients looking for these days? What is their risk appetite?

I think everybody’s torn in that they want safe properties, with safe cash streams, because on the one hand everyone is still a bit leery about the economy and what’s going on in the world, and yet they want return. As a result, the mass of money is pouring into what I would call the best properties and the best markets, and this has been going on for two years. They want safety and confidence, and yet because there’s so much money pouring in there, they’re frustrated on return. The Federal Reserve had so manipulated interest rates so the safe stuff — you’re not getting good returns.

So you’re forced to go elsewhere. Everyone is trying to read a manipulated financial market where you can’t find returns where you would normality find it, so you start going to where that money isn’t, and you start worrying about that economy. Depending on their courage, they’re deciding they are or are not going outside of that zone.

Do you see much interest in San Francisco from your clients?

Institutional money definitely wants to own the best properties in San Francisco; San Francisco is viewed as one of the strong markets. It’s added jobs quite well compared to the rest of the economy. Tech has done a lot of good in terms of growth.

I would say San Francisco, DC, Boston, New York City, and West L.A. have been the in-favor markets. But even there, for the better buildings, they don’t have to be trophies. Two years ago they had to be trophies. Now they don’t have to be trophies, but still the better half of the properties.

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John Zipperer is the former senior editor of Apartment Finance Today and Affordable Housing Finance, and the former new media editor at the CCIM Institute. E-mail: [email protected].