March 9, 2016

Just today I was walking my little dog Bravo down Washington Street. Two doors from my home, I stopped to talk with a neighbor. I’ll call him Dave. I have lived here 6 years and I’ve seen him many times, often stopped to chat for moment. He’s a nice guy. Others in the neighborhood speak highly of him.

He disclosed to me that he’s moving on Friday. He has been a renter here for 23 years. The woman who owns the home is exercising her rights to return to the home and live in it. He said there is no legal protection for him in this particular situation. He and his wife have found a place further out, but still in the city. Good for them. He raised his kids here, and it’s sad for them and for neighbors to see him forced to leave.

But he’s one of the fortunate. He has an established chandelier business operating out of his home. He is probably a little better off than the average renter in this city. So, I’m glad for Dave.

But what is the solution regarding rent control in San Francisco?

There is a serious problem of insufficient affordable housing in some of our major cities, and many of them have adopted rent control as one of the measures to try to protect lower income citizens who cannot afford to buy, and cannot afford the kind of rent increases which occur sometimes. According to Zillow, rent has increased in San Francisco neighborhoods from 11% to 30% in the past year alone. Rent control is allowing about 1% increase in rents by landlords in rent controlled properties (those built before 1979). Without these protections, many of lower income tenants would not be as fortunate as Dave. They would have to relocate to distant suburbs, the closer of which are also rapidly becoming unaffordable. So, I don’t blame anyone who is taking advantage of rent control for doing so.

But there are big problems with rent control. One is the challenge to landlords. I’m occasionally one of those. When I am, I obey the laws to the letter. But as the restrictions on landlords keep increasing, the challenge of finding landlords who want to own such properties increases. How can an investor estimate her/his likely return when you don’t know whether your tenant will say one year or perhaps 23 years? If the latter, your return on investment is likely to be negative or extraordinarily low.

Is it fair to landlords who own or want to buy buildings built before 1979, to restrain them to annual increases like 1% when market increases range from 11-30%? No, it’s not. I don’t blame Dave, but he has had a huge windfall of protected rent levels for 23 years, and the landlord has had a huge loss. Rent control motivates many landlords to minimize maintenance and/or improvements and service because they are in the red already. Others are forced to seek ways out by moving in themselves or “Ellis acting” the property and selling the units individually to buyers. So, in economic terms, rent control is a “blunt instrument” in the fight to achieve affordable housing solutions in San Francisco. It certainly does not add to the stock of affordable housing. It slowly removes units.

The new conditions being considered to be imposed on developers–that affordable housing up to 25% of the units being built be required–also are a blunt instrument. The measures proposed by some of our “Progressive” Supervisors are supported by many citizens who object to almost any change in our city. Developers cannot make any sizable contributions to housing with that requirement, due to the costs of land and the lengthy, expensive, and risky path to declination or approval. Affordable units are sold at a loss to developers, so market rate unit mix is critical in estimating the chance for a profit.

These proposals dictate to the private market (developers) impossibly high economic hurdles. These proposals will simply slow development to a near halt. One thing Progressives fail to understand about developers–development is a very high risk business. It’s not a license to coin money. Many projects are stopped, many fail, many lose money, and it’s hard work and high risk to get one done and make money on it. Which of us would invest in something that has only a chance to succeed, takes money along the way, and if successful, the returns are 10 years out?

Often when success does happen, it’s primarily due to the Progressives making it so hard that there is little supply of new homes when the project finally is finished. Increasing demand and little supply drives the price at the end of 10 years to levels that neither developers nor Progressives could have imagined–but only for the very few projects which can make it through the gauntlet.

If rent control is not the answer and additional demands imposed on developers are not the answer, what is?

Regrettably, with all the complications of it, this is a problem perfect for government. It’s not an acceptable excuse that attempts by government in the past failed in some cases. The attempt to force the solution onto the private market has had a long run now, and it is failing miserably.

We need affordable housing, a lot of it. We’ve been trying to turn it over to the private sector but simultaneously over-regulate it.  We fall farther and farther behind as we try harder to force developers to do what they cannot economically justify. People like Dave are increasingly forced out. Their departure is bad for all–bad for restaurants, bad for retailers, and ultimately also bad for all the capitalists who rely on the labor of our lower paid workers who need and deserve to live in our cities.

I’m a huge advocate of more affordable housing. I welcome it here in my Pacific Heights neighborhood, and on my block. All we need is a property, a developer, and sufficient City financial assistance.

What can government do? More on that in a future post, but when the private market simply cannot do the job based on its essential motive–profit to owners, when risk is high and profits are insufficient to motivate, we have to look to government to step in and partner with the private market. We have to fix the problem of government and enable our government to take the right actions–that’s going to mean money and investment. But there is a return on government’s investment. Returns come in the form of a better city for all, enhanced attraction to investment and jobs, and increased tax revenues from increased economic growth.

As David Prowling explains, the unique San Francisco resistance to change fuels the Progressive movement. Progressives add regulations and demands.Regulations are not going to contribute to the solution, unless in the form of less, not more.  Meanwhile, the Right is obsessed to constantly reduce taxes (revenues to government) and shrink government, thus denying the economic ability of the right partner to help solve the problem.

Thus, in our beautiful and (to date) successful City by the Bay, we have come to represent the extreme in standoff and gridlock, which is also paralyzing our nation. We need to find the avenue to being an example of the solution.