Bay Area Affordable Housing Developers Face Significant Demand, But Not Many Options To Increase Stock

Bay Area affordable housing developers are facing incredible demand for every delivered housing project as rents and housing prices have risen. Every project gets thousands of applications for a few dozen units. Cities, counties and developers are looking for ways to increase affordable housing stock to keep more families in the Bay Area, but the region may never catch up with the level of demand. 

“There is a lot more of a sense of urgency to find some solutions,” Resources for Community Development Executive Director Dan Sawislak said.

The housing crisis has picked up in the last two to three years, rents are not falling and home values are increasing, according to Sawislak. He said 15 to 20 years ago affordability did not impact certain Bay Area populations, such as high-income earners, but he said now there are few people who are not impacted by affordability challenges. Even high-income tech workers are having trouble affording housing.

“For the last 25 or 30 years, affordability has been an issue,” he said. “It is getting a lot of national attention and statistics show that most large cities and a lot of rural areas have a lot of affordability issues.”

In Oakland and Berkeley, the top issues are homelessness and affordable housing.

“We’re seeing a huge spike in homelessness and it is visible in places like Oakland and Berkeley,” he said. “Even parts of Contra Costa County are seeing it.”

He said new funding is coming in from local bonds and tax measures in Oakland and Alameda County, which will help drive new developments throughout the county. The loss of redevelopment has impacted affordable housing funding over the last 10 years and resulted in a lot of affordable housing not being built, he said.

Unprecedented Demand

The demand for affordable housing is going to increase. Affordability restrictions will wear off over the next 10 years under the Low Income Housing Tax Credit and other subsidized programs including Section 8, Haring Street Ventures managing partner Diane Olmstead said during the recent ULI Housing Summit in San Francisco.

Demand is already massive. The last time RCD did a rent-up in Alameda for 35 units, the company received 12,000 applications. For its most recent housing development, Riviera Family Apartments, in Walnut Creek, the website crashed during the first day of applications, Sawislak said.

Sawislak said the Bay Area economy has created a massive number of jobs — more than in other parts of the country — but not enough housing has been built. Many people have just enough money to pay for rent, but very little in savings to help for unexpected expenses, he said. When a personal financial crisis comes up, people often struggle to pay the rent.

He said a lot of recent college graduates who grew up in the Bay Area are unable to find a place to live and many are moving out of the area.

“When I first came here, it was fun and exciting and a great place to be, and that is still here,” he said. “But [living here] is not an option for most young people.”

RCD tends to focus on housing for people with the fewest options, such as people who are homeless or at risk for homelessness, he said. RCD also has provided housing for working families and seniors — something the company would like to do more of. He said the next big tsunami of demand will be driven by a need for affordable senior housing.

In the next five to 10 years, he said he expects a robust and rich pipeline of projects and far more affordable housing to be completed.

Developers Propose Solutions

Additional developers have been looking for ways to create more affordable housing stock and to build for middle-income earners who fall outside of federal subsidies. Developers often cannot afford to build for this income level because the rents are not high enough to get the returns to make the build-out worth it.

Enterprises Community Partners buys existing buildings and renovates them into permanently affordable units. Enterprises Community Partners Deputy Director Heather Hood said during the ULI event that preservation is one way to keep people from being displaced in the Bay Area and her company has completed hundreds of units in Oakland that are now permanently affordable.

Related California CEO and Chairman Bill Witte said during the event that his company has experimented and worked with every program that exists today. Related California develops 100% affordable housing, market-rate and mixed-income housing all over the state. It is building three large mixed-income projects in San Francisco with 20% of the units affordable. In September, it opened a 100% affordable housing project with 198 units in Mission Bay.

One way to promote more development of affordable housing, especially for middle-income housing, is to build on publicly owned land and provide a property tax exemption, he said. This was done with a Related project in New York that led to a 900-unit 100% affordable housing project on Long Island. Witte said this project provides housing for different tiers of income up to 200% of the area median income. 

If the tax exemption were extended to 120% of area median income, returns could increase as much as 50 to 100 basis points, which would theoretically make up for a loss of net operating income due to the lower rents, he said.

Witte said the downside is it can be tricky to convince cities to go along since it would mean cities would have to give up additional property tax revenue at a time when pension obligations are increasing and budgets are constrained.

AGI Avant President and CEO Eric Tao said the idea of lowering property taxes would also benefit affordable housing projects especially since property taxes make up half of the operating expenses in San Francisco.

State Assemblyman David Chui proposed AB 3152 that would provide nonprofit developers with property tax exemptions for building housing for middle-income housing, such as those families earning 80% to 120% of the area median income.

Changing how investors think about apartments may provide an additional solution. Tao said while working with a ULI work group, the idea of turning real estate into a fixed-income investment was considered.

With workforce housing, the assumption is occupancy would be consistently at about 99%, which would guarantee a return even if it is much lower than a traditional market-rate housing project.

He said if these projects could generate a return of 3% to 4%, that would be a steady fixed income as opposed to the opportunistic developments that often push for 13% to 14% returns and lead to higher rents.

The downside is there is no vehicle to create this kind of investment since investors prefer fixed-income investments out of Wall Street and do not see apartment buildings as fixed-income.

“Housing is not like buying stock or buying other products,” Tao said. “It is part of the infrastructure of our society and we need to look at it that way and invest in it that way.”

Find out more about how developers are addressing the housing crisis at Bisnow's Bay Area Affordable Housing event May 10 in San Francisco.