Priced Out: San Francisco’s Rent Problem

What are the factors contributing to the meteoric rise in San Francisco rent?”

By Tristan Baylor

It’s not a controversial statement to say that San Francisco is facing a serious, structural housing crisis. San Francisco rent prices exceed those of any other U.S. city, with the average apartment rent costing a staggering 3,809 USD a month, up from 2,563 USD in 2011. For comparison, the average rent in New York City is 3073 USD, about twenty-three percent cheaper. Housing prices dipped during late 2016 – 2017, but the fall seems to be attributed to discouraged potential-homebuyers leaving the market, and not the beginning of the realignment of housing prices. Fortunately, many of the structural, underlying causes of this crisis can be addressed. The first part of this article will generalize on what drives up rent costs in the first place, and the second will look at factors specific to San Francisco that drive the crisis.

Why would rent prices rise?

     Rent prices soar in many U.S. cities from basic supply shortages, specifically those caused by restriction of construction on new housing. Some of these restrictions can be explained by the geographical limits of cities; for example, the borough of Manhattan in New York City is only about thirty-three square miles, leaving a finite amount of space to build upon. Cities can work around this by building taller, denser buildings, but considerations of parking, park space, and general overall livability still create shortages that don’t satisfy the demand. These shortages are particularly important because of the specialized nature of many U.S. cities. If you want to work in finance, technology, or entertainment, New York, San Francisco, and Los Angeles are the dominant respective options for each of those industries. Pricing people out of those industries makes it more difficult for the most competitive labor to relocate there. Current residents of a city also play an important role in this problem – many home and apartment owners will lose the value of their property if new buildings are constructed in their neighborhoods, giving them a monetary incentive to oppose increased supply.

What’s happening in San Francisco?

     A compounding and specific element to the shortage of housing in San Francisco can be accredited to complex construction permitting process. As TechCrunch reports, building permits in San Francisco are discretionary rather than as-of-right; in other words, every new development in San Francisco takes months to just receive a building permit. Furthermore, those in the area of the building development site can file lawsuits challenging the environmental impact of the development. While that may at first seem an important regulation, it has become a de-facto method for wealthy neighborhood residents to protect the value of their property by introducing groundless and frivolous lawsuits that take time, money, and resources for the development company to resolve. This long, arduous process can take anywhere from months to years before a developer even begins construction on a project. The barriers to entry discourage many potential housing-suppliers in the market, and the regulations act as a pseudo-tax on any development companies building in SF. The height ordinances in San Francisco are also seriously lower that similarly sized U.S. cities. The map below shows building-height ordinances throughout the city — the yellow neighborhoods are capped at two-story high buildings.

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What can be done about it?

     One solution to these problems would be issuing permits on a less discretionary basis if the developer matches the city plans’ current zoning and height restrictions, speeding up the permitting process. Additionally, imposing a more severe penalty on frivolous lawsuits filed against developers will discourage illegitimate attempts to block development projects. As things stand, the cost and difficulty of this process disincentivizes development companies from entering the market. The easier it is, the more development companies enter the market and compete for development projects, and the more rents will fall.

     While the crisis can not be explained purely through supply and demand, it is a step in the right direction to increase the supply of housing and drive down prices to make San Francisco a more accessible and affordable city. Granted, it is unrealistic to expect that more desirable cities like San Francisco and New York will have rent on par with mid-tier U.S. cities, but it is important to keep prices low enough to foster competition in the biggest U.S. cities and reinforce the U.S. as a land of opportunity.

 

References

Cutler, K. (2014, April 14). How Burrowing Owls Lead To Vomiting Anarchists (Or SF’s Housing Crisis Explained). Retrieved from https://techcrunch.com/2014/04/14/sf-housing/

Mak, L. (n.d.). Everybody disagrees on how to solve San Francisco’s affordable housing crisis. Retrieved from http://kalw.org/post/everybody-disagrees-how-solve-san-francisco-s-affordable-housing-crisis#stream/0

Rent trend data in New York, New York. (n.d.). Retrieved from https://www.rentjungle.com/average-rent-in-new-york-rent-trends/

Rent trend data in San Francisco, California. (n.d.). Retrieved from https://www.rentjungle.com/average-rent-in-san-francisco-rent-trends/