San Francisco lawmakers have cut a deal to temporarily walk back affordable housing requirements for new housing construction in the city, the latest effort aimed at boosting its economic recovery and kickstarting dozens of stalled projects.
Real estate developers have long blamed affordable housing requirements as adding to the high costs and challenges of building in one of the nation’s most expensive housing markets. The agreement reflects a local economic downturn that's attracted national attention after the market with the strongest office rent growth of any major U.S. city before the pandemic now has some of the highest office vacancy rates.
Under the officials’ Housing Fee Reform Plan, quotas would be rolled back, reducing the number of affordable units developers must include for approved projects as well those proposed over the next three years. The measure also lowers a handful of development impact fees that are levied on new housing construction to pay for all or a portion of the costs of providing public services for a project such as open space or transportation.
“We are fundamentally changing how we approve and build housing in San Francisco,” Mayor London Breed said in a statement to CoStar News. “By reforming our fees and setting them based on data, we can make sure we are delivering new housing, jobs and the economic benefits we all want for our city.”
The measure is estimated to push through roughly 8,000 housing units across the city that have already been approved but have yet to start construction. About 2,500 of those units are proposed in and around downtown San Francisco, which has evolved from a vibrant hotspot into an area plagued by significant office vacancies.
Even then, multifamily rates in the city remain among the highest in the United States at an average of more than $3,100 a month.
Renewed Bet on Housing
Across the country, leaders of major cities such as San Francisco, New York and Washington, D.C., are scrambling to build back momentum lost to the pandemic by trying to switch the focus to new housing construction to juice demand and activity. Some have proposed ways to make it easier to convert empty office buildings into housing, while others are clearing the development red tape to streamline the approval process.
The commercial real estate situation in San Francisco is relatively dire compared to other cities throughout the United States, however, with office vacancy rates shooting beyond 17% compared to roughly 7% in 2019, according to CoStar data. In some pockets of downtown, the availability rate is nearly 30%, and with leasing activity largely muted, there are no signs of an imminent turnaround.
The combination of remote work, record-high sublease availability and office vacancy rates, as well as worsening socioeconomic conditions, have stewed since the beginning of the pandemic, contributing to a nearly $800 million budget deficit. What's more, office leasing and investment is a small fraction of what it was prior to 2020, meaning that source of critical tax revenue is unlikely to return anytime soon.
The Housing Fee Reform Plan is expected to take effect Nov. 1 after getting cleared by the Board of Supervisors and signed by Breed. The changes will expire after a three-year period unless otherwise renewed.
If approved, the inclusionary housing percentage — or the number of affordable units required for each housing project — will be lowered to between 12% and 16%. This will provide “special relief” to projects already approved but where work has been stopped due to rising building and financing costs, according to Breed’s office.
Market-rate developers in San Francisco, under the current requirements, have to set aside 22% of a project’s total unit count for affordable housing, which is restricted to households earning 50% or less of the city’s area median income.
And based on 2023 U.S. Department of Housing and Urban Development data, a four-person household making less than $72,050 a year qualifies for San Francisco affordable housing.
The measure would also change the way the city calculates development impact fees, which the mayor’s office said has been based on a structure that is "unpredictable and causes severe cost escalations through the life of a project." The proposed revisions would limit those fees to a 2% increase each year moving forward.
Impact fees, which vary based on individual projects and square footage, have increased by more than 30% over the last five years alone, according to Breed's office.
“Our Inclusionary Housing laws have always been about maximizing the highest amount of affordable units that the private market will bear,” Supervisor Aaron Peskin, who helped draft the measure, said in a statement.
He added that “this temporary reduction in affordable housing obligations is intended to kickstart housing development at this critical time in San Francisco’s economic recovery. I think there's a lot of folks, many of whom I've spoken to, who are going to move forward with large residential projects that they've already gotten approved."