~ Gary London

San Francisco is as schizophrenic town as I have ever seen.

If you add up the construction activity southeast of downtown, there are some 17 new projects, mostly high-rises, including the Transbay Terminal project which includes the 61-story Salesforce Tower and the adjacent four-block elevated park, both under construction.

The City is on fire with new construction. Yet, it remains perhaps the most cantankerous City in all of the U.S., in terms of its attitude toward growth, its regulations and its concomitant costs. Foremost of these are requirements to set aside as much as 40% of residential units, or in some cases fees in lieu of, for “affordable housing”.

It’s a regulatory quagmire. Piles of regulation to achieve social justice. Two observations:

1. The streets of SF are as smelly, laden with morning garbage, and with homeless in what feels like every doorway of the retail and business districts downtown. Somehow the homeless or their advocacy agencies are not getting the memo. The problem is BIG. The money and the homes don’t feel like they are getting to the poor, sick and otherwise needy. The housing is getting to young persons who are gainfully employed, yet cannot afford to otherwise live in the City without some sort of subsidy. (I chatted with a young developer whose job it is to achieve entitlement for San Francisco projects, who lives in a rent controlled unit in the City, the only means of affordability.)

2. As much as local developers complain about this quagmire, they are not particularly activated to change much. The development game in SF is not for the faint of heart. It is for the deep pocketed “insider” developer who is willing to put up with the front-end capital risk, endless meetings and negotiations, changing regulations and deals….all to ultimately achieve the development of projects with the apparent knowledge that demand is insatiable, undersupply of housing perpetual, such that there is a permanent elasticity in pricing.

In other words, if it costs more to provide for the rules and costs of “affordable” housing and other regulatory responsibilities, so be it. The end user can pay for it.

That’s the paradox. On one field trip my Urban Land Institute colleagues and I walked into a project called “Lumina”, a shiny vertical high rise condo now in early sales. Prices ranged from $1,000 to $2,000 per square foot for very ordinary units, although some higher floor units boasted view premiums.

The housing consumer gets to overpay for a home in the City, not just because it is a small City and construction is expensive, but also because of the regulatory bribe that gets factored into the cost of the home.

The result? SF becomes even more expensive, which further eliminates otherwise gainfully employed, “highish” income earning persons from entering the home market. The situation also exacts its toll in the form of apartment rents, which inevitably rise with the spillover demand from would-be home purchasers who otherwise would and should be buyers.

What a mess. I suppose the reason for this little missive is to request planners and policy makers to think very carefully about their imposition of similar rules in your own communities. The regulatory quagmire feels like it accomplishes very little, except the creation of new agencies, social advocacy lobbyists, lobbyists to fight them, bureaucracy to oversee the quagmire and policy makers who campaign and are elected on a promise to fulfill and perpetuate the fantasy.