HOUSING SHORTAGES AND OTHER PROBLEMS

Much has been written about serious shortages of affordable housing and other land use problems in Cities across America. President Trump has now taken up the California homeless problem and the State is enacting broad controls over rent increases in housing. The problems have been attributed to numerous causes but most of the causes seem to be descriptions of results and not the core problems. Using the City of San Francisco as the laboratory may be helpful in understanding causes that may be applicable in many jurisdictions.

A Jurist opined (the case is unimportant) in an old zoning case something to the effect that “the purpose of zoning is to plan for the future and should not be used to deny the future”. Unfortunately, for various and sundry reasons zoning became politicized, resulting in the rise of “NIMBY (Not in my back yard) political pressures. San Francisco provides an excellent example of this reaction.

In the 1970’s an activist caused a public vote on an initiative to limit the height of all buildings in residential areas to no more than 6 stories. The mantra was to prevent the Manhattanization of San Francisco. The public rejected the initiative at the ballot box but it didn’t stop the politicians from a massive re-zoning effort that resulted in effectively reducing most allowable densities by 50%. In a City with 36 square miles this had the effect of limiting the future supply of new housing by half of what would have been permitted under the previous densities. The Planners went on from there to adopt all manner of added problems for developers limiting the height and bulk of buildings to a requirement for each new building to contain a percentage of “affordable housing units”. In addition, a one for one parking requirement (one parking space for each residential unit) was put in place. Since zoning regulations impacted residential, office, commercial and industrial uses, each sector needs to be examined independently.

In the housing sector the theory was that developers would be happy to contribute the requisite “affordable housing” in return for the ability to develop. That was the most ridiculous theory ever concocted. Developers don’t contribute anything other than the completion of a building. All of the costs of production are built into the rents or prices charged resulting in the end user or consumer paying for everything. When the cost of production exceeds the anticipated recovery through rent or sales price the building just doesn’t get built.
Accordingly, the cost of the “affordable housing” element just gets passed on to the ultimate user and contributes to an unnecessary and limiting rent cost or purchase price. There is something wrong with this concept.

In a similar restrictive move, it became illegal to demolish a single family dwelling without replacing it. Thus, developers were unable to use the typical strategy of purchasing a group of adjacent houses for replacement by a high-rise apartment building in favor of maintaining an existing supply of single family housing. The result is a supply of bungalows now costing well over $1,000,000 each to purchase.

In addition to these issues, all older residential buildings (buildings with Certificates of occupancy dating to July 13, 1979 or earlier) are subject to rent control with rent increases limited to 2% per annum causing renters to give up too much if they voluntarily move out. Once a renter moves out the landlord is free to increase the rent to any level under current guidelines. This limits turnover in what might have been a rolling supply of less expensive rental units’ in older buildings where rent control prevailed.

It should be obvious that inept planning and the role of political pressure had a substantial limiting effect on assuring an adequate new housing supply. The situation requires a massive rewrite of all the rules to make sure that there are incentives to produce new housing at a pace unseen in eons. Mitigating against this ever happening is a large number of entrenched interest groups.

The problem causing the lack of affordable housing is, simply put, a lack of adequate supply. This problem, which was inevitable, began over 40 years ago with well-meaning but very flawed policies. The obvious solution to the housing shortage is to increase supply. Every other type of possible solution may have some positive impact but will not do anything to materially increase supply by a sufficient amount to solve the shortage problem on a long-term basis.

Limiting density and rent control may have been politically attractive but, in concert, they set the stage to reduce supply. Limiting densities seriously limits new supply and rent control is great for the current occupant but results in a lockout of newcomers to the market. The problems of both of these factors need critical restudy with a goal of causing an immediate resurgence of supply even though such may take years to resolve the current problems.

The citizens of San Francisco need to agree that when the City has policies designed to retain single family housing, that policy is not realistic in the current time. The only way the housing needs can be accommodated at affordable prices is to encourage high rise development and eliminate unnecessary design and construction requirements plus eliminating additions like providing affordable housing. Logic dictates that the modern city must gravitate toward tall buildings, particularly where there is no buildable land, in order to sustain population growth. Tampering with supply, as a policy, is very misguided.

In the office building sector, it became politically attractive to limit new office development. The land use rules were changed circa 1985 to limit new office development permits to a total of 950,000 square feet per year with any unused allotment carried over to the next year. All potential developers had to compete for a permit in what became referred to as a “beauty contest”. The prize became a permit to develop but the costs of that permit became an artificial financial burden due to the distinct possibility that unlimited added funds might need to be invested and substantial, costly time delays might be involved. In addition to these risks the “design criteria” included many difficult and sometimes questionable requirements such as bulk limits, shadow ordinances, pubic art, and other things that increased the cost of new development.

The result of limiting new permits, in and of itself, had the obvious impact of limiting supply based on wholly political considerations rather than on economic considerations which should be the sole determining factor on the question “to build or not to build”?
The result of the permit limitations was to artificially increase the rental value of all existing office space and make it an almost certain outcome that a developer with a permit would achieve the necessary lease up. Zoning and planning professionals should have absolutely no role in enacting rules designed to interfere the operation of the economic laws of supply and demand except by design where the goal is to increase supply for a valid reason (like making sure adequate space is available to keep the market in balance).

Expensive office space becomes a barrier to entry for small, start-up businesses and gives the large, financially strong corporations a marketplace advantage in competing for space. San Francisco (and other cities) now find themselves facing a shortage of office space because of misguided roadblocks to new development. Planners and politicians must grasp the obvious that limiting supply just causes rents to rise and eliminates a segment of potential users from the market. Limiting supply did not help the City but it provided windfall profits for owners of office buildings through rapidly rising rentals.

The retail sector (excluding the downtown CBD), relative to Neighborhood Commercial Districts experienced a different set of problems. At one point, banks, restaurants and title companies were seen as a threat to the “mom & pop” retail stores. The solution adopted by the planners was to limit those types of tenancies. The limitations were extended to rule out chain stores which were originally defined as any retailer with more than eleven (11) store units nationwide. This solution was not very well thought out as to what it accomplished and what unwanted consequences it might bring.

The planning experts did not recognize that the “mon & pop” stores already in business might have been able to survive for a few more years on their own strength but that the barriers to entry would prevent new start up retail businesses. Those barriers included much more than rent such as the need for adequate capital (the retail business is very capital intensive), labor cost, supply chain problems, necessary business expertise, competition from department stores, regulatory burdens, theft etc. The retail environment had moved away from a “mom & pop” business model. A wannabe independent retailer was able to acquire a franchise of a well-established merchant with the Franchisor providing all necessary business management acumen and systems including supply chain management and other operating expertise. However the operator still needed to provide the capital for operations. Yet, with the chain store limitation in place, franchise operators ran into the 11 store limitation.

To complicate the picture, the explosion of retail giants like Costco and the entry of on-line retailing giants like Amazon added a competitive force that increased the problems facing brick and mortar stores. Consider booksellers for a moment. Once bookstores were a staple of all mature shopping areas and now that is not the case. The growth of E Books completely changed that business model with major as well as local retailers disappearing from the scene with very few limited exceptions.

The retail environment experienced major changes that resulted in a substantial reduction in demand for brick and mortar store spaces. Most areas of the country are experiencing a significant rise in the vacancy of retail stores of all sizes. Many people believe that the retail vacancy now present is the result of “greedy landlords” who choose to keep their store space vacant until they can get the rent, they “want”. That is a completely preposterous thesis applicable only to a mentally deficient property owner.

Landlords are subject to market forces and can only hope to achieve the rent that the market will support. It may take time to get there but eventually the market wins out. But when vacancy is the result of a lack of demand there isn’t much a landlord can do to change things.

If the planners had resisted tampering with the demand for retail space it all may have turned out differently, but now there is a serious vacancy problem.  Again, the planners and politicians are jumping in to try to solve the problem.

A solution being discussed is to “tax” vacancy in the belief that a “tax” will force the landlords to lease vacant space. If anything is misguided that certainly is. The only program that will absorb vacant retail space is one that will increase demand.  To do that, the planner need to strike out all restrictions on space use such as prohibition of chain stores, limiting restaurants etc. and stimulate more potential retailers to step into the water.  In addition, the City must streamline the permit process so that a retailer does not need to spend all of its operating capital waiting for permit and complying with regulations that are unnecessary. For far too long the permitting process has operated with an attitude that the City is doing the retailer a favor by issuing a permit.  That Is just not the case.  If the Cities all look to jurisdictions where the permit process is fast, well spelled out and lacking roadblocks, vacancies might begin to be absorbed.  Punitive taxes will not do the trick.

Big Box retail may be running out of steam based on observation of the number of large stores that have gone out of business. Unwittingly, San Francisco may have dodged the bullet on big box retail by making it very difficult for those large retailers to enter the market. However, the rules did not consider what was best for the people.  The question needs to be addressed by Planners as to whether protecting or trying to protect small merchants from competition is better for the people than the competitive pricing resulting from the large retailers.

At the end of the day, Planner and politicians must wonder why there are very few, outstanding, architectural masterpieces among the new buildings built in the City. There was opposition to the Trans America Tower when it was proposed and now it, like the Eiffel Tower in Paris is an icon of San  Francisco. The Planners need to visit Dubai, Abu Dhabi, Hong Kong, Shanghai, Singapore and London to name a few and study the kinds of regulations that will cause great architecture to happen.  The “beauty contests” of the past failed to produce any great architecture with very few exceptions.  Something is wrong.

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