Abandoned stores, empty homes: why San Francisco's boom looks like a crisis
theguardian.com
theguardian.com
The political inclination of government (and the mistaken belief of voters) to "keep things the same" and prevent gentrification or any kind of development matching the demand for people to move here may play well for votes, but is causing every problem you can see.
The constraints on housing and development trickle down to everything. The cost of hiring people, the price of retail/commercial space, the inability to police / prevent crime, the emptying out of formerly affordable neighborhoods, traffic, homelessness, etc.
This is not a puzzle. When you make land so valuable (which pleases some), it leads to things that cannot show their value clearly to be priced out. And the very policies that are intended to protect the people who got here first (a very questionable policy), end up hurting them. The more you try to control rent, the worse the situation gets. Politicians intend well. But intentions are highly overrated. Effects are what matter.
As long as we refuse to build up, out, and have rational transportation systems (overcoming local inertia against building them), and accept that we're growing, this will continue.
Got an old friend in the Tenderloin, and he loves it, even though he's got a wife and 2 roommates.
Since California passed Proposition 13 in 1978, property tax rates for those San Franciscans who owned property back then have been severely capped. Owners may pay Nixon-era property tax rates, while renting out those spaces at rates that have exploded in the last 40 years. They, too, can afford to let buildings sit empty.
There have also been vacancy taxes proposed: https://reason.com/2019/12/10/san-francisco-ballot-measure-w..., but Prop 13 reform would seem to be the more obvious route.
Property taxes should be proportional to the value of the property. We shouldn't give special breaks to one group or another just because we like them more.
This is going to be difficult to unwind fairly but it is only going to get worse if we don't.
> "The majority of the building owners, and certainly retail brokers like myself, all are aggressively trying to fill these vacant spaces," wrote Hansson. "In almost all cases, the rent is not the stumbling block; it's the high cost of starting the business, strict government regulations, and the risk of ultimate success."
I don't buy that argument fully. Why is the place vacant in the first place? Usually because the pervious, sometimes long-term business, could not afford the double, or triple rent increase. The question is, Did the owner of Sparky's really want to close, or were they not able to afford the rent increase? And now, we are suppose to believe that the place is empty only because a new business wants to pay that new amount and they're just waiting on permits?
Although higher-end malls in growing cities are mostly doing pretty well, there's certainly no reason to think that urban retail in general should be immune from at least some of the same forces that help create the "dead mall" phenomenon.
I was walking through Cambridge yesterday for the first time in a while. In addition to a non-trivial number of empty storefronts my sense was that there was at least a bit of a shift away from retail and towards trendy-looking restaurants.
You buy a home in a poor neighborhood. Twenty years later the value quadruples... and now the cost of living skyrocket?
Also, would make retiring tricky.
For example, because property taxes are essentially capped, CA needs to rely more on sales taxes, which are notoriously regressive.
Tax policies play a big role in setting up market distortions like those happening in San Francisco. It's not just the rate, but the basis. Strong Towns has a discussion of the idea that taxing land, not improvements leads to better outcomes:
> A parking lot in a bustling downtown is the classic example of a property where nearly all of the value is in the land itself, not the asphalt on top of it. In a rising market, you can hold onto the land and watch its value go steadily up (thanks to all the things your neighbors are doing to make the place more productive and successful). You can collect enough in parking fees to cover the taxes, and cash out when you're ready to cash out. Your property tax bill will be relatively low, because it's based on the sum of land value and improvements. The land may be in a central, prized location, but the "improvements" on the property (that's tax-assessor speak for any sort of structure built on the land) are worth next to zero.
https://www.strongtowns.org/journal/2019/3/5/whats-with-that...
This line of thinking may also apply to empty shops in SF. As long as the overall property is covering expenses, why bother making the improvements needed to attract new tenants (and thereby adding the tax burden) when you can just sit back and watch real estate prices head to the moon.
> George was in a position to discover this pattern [mere land possession harms the poor, and can be discouraged through a land tax], having experienced poverty himself, knowing many different societies from his travels, and living in California at a time of rapid growth [1870s]. In particular he had noticed that the construction of railroads in California was increasing land values and rents as fast as or faster than wages were rising.
https://en.wikipedia.org/wiki/Henry_George#Political_and_eco...
The trend now is for small shopping plazas or outdoor malls being sold off to developers to build Condo complexes. Complete neighborhoods have no shopping anymore forcing residents to drive instead of walk to get groceries or enjoy a stroll.
It doesn't help that these cash strapped cities (Toronto) just rubber stamp any new development since the tax haul will be several times what they got for what was there. A 20 story Condo brings in a lot more revenue then a parking lot and strip mall. I won't even start about all the green space they are selling off to developers. It's out of control.
All residential development has been frozen. There are a few small areas where very modest amount of housing has been built, but even there it has been with an abundance of retail, that takes a long time to find retail tenants. And because most of the city is blocked from any development; and only small areas get what look like massive changes, it take many years to adapt.
The entire western side of SF is basically unchanged in the 20 years I've been in the area, and the age of the buildings say that it's been unchanged for decades more.
The only other way to deal with the mismatch of shortages is to have waiting lists or lotteries. Both of those are used for subsidized housing in SF, and the lotteries are ridiculously lopsided, to a tragically comic degree.
The only people who benefit from the shortage are landowners, and boy do they take it in.
I grew up in the bay and now live elsewhere because the price of living in the bay became unjustifiable to me. I don't see why so many people feel that they are entitled to live in a place that they do not own and feel its the role of the gov't to ensure that they have a place to live.
Those of us who live here do not exist as islands. We all participate in a rich economic web that requires exchanging services with lots of people. Teachers, bus drivers, delivery people, shop keepers, mechanics, plumbers, police officers... it takes a lot of people to run a society.
Typically the "not everybody has to be able to afford to live here" mindset has worked only when there is a wealthy exclusive enclave that tries to keep out poorer people and races they don't like, but when that community can still draw workers from more affordable places nearby.
The Bay Area has taken that "these people we depend upon for our lifestyle don't deserve to live here" attitude and applied it a region so large that people can no longer commute in. It leads to extremely dysfunctional societies.
1: https://www.blogto.com/real-estate-toronto/2019/07/toronto-c...
So there's lots of construction, but prices and rents keep going up. But there are signs of it softening a little.
https://www.thestar.com/news/gta/2019/07/12/apartment-vacanc...
The problem is not too much building, but not enough. The only real solution to the real estate problems in expensive cities is to get enough new building that real estate values tank.
I could fix the SF real estate market in 10 seconds (although it would take maybe 10-20 years for developers to enact the change).
1. Minimum residential zoning is 15 story multi-family (subject to engineering limitations)
2. Axe rent control
3. No requirement to conform to the character of the neighborhood
This would make lots of people very unhappy. People wouldn't like it that huge buildings are going up next to their 1 story house. People wouldn't like it that their real estate values will tank my 80-90%. That's a big part of the reason why there will never be a fix.
But that level of change is what's necessary to fix the problems the city has.
The most basic, fundamental laws of economics are the relations between supply, demand and price.
If you keep demand relatively constant and dramatically increase supply, price will fall.
Indeed, because of the close substitutability of owing and renting, the only way to get rents lower is to also decrease property values.
Sure - induced demand is a thing. But induced demand is a secondary effect: people move to a place because the cost of living is now lower; it can slow the decrease in rent, but it can't stop it
More importantly, it's completely possible to just out-build induced demand. There are simply a limited number of people who want to live in SF (although admittedly, that number is quite a bit larger than the number who are currently living there).
So the more nuanced relation is: when supply dramatically outpaces demand, price will go down.
Just to make sure we're both on the same page, I'm advocating increasing the number of bedrooms in the city by a minimum of 1-2 orders of magnitude.
I live in Albany, NY, a tiny city that has a mix of middle-income and low income residents. It's the state capital, so the fairly narrow salary bands of government workers define the market. The city adopted a model zoning ordinance to make building easier, and now there's a mini-boom of medium-density apartment construction, all of which is upmarket. All of the development is 4-5 story stick on brick buildings. New York provides generous tax incentives for apartments with retail space, so most have that, and most of that space is vacant.
It's creating some potentially bad outcomes, as it's cutting off the oxygen for aging flats and single family homes that have been rentals. You have more vacancies as people with money move into new apartments that are cheaper due to the tax abatements. The older properties that pay taxes are going downmarket, and the bottom tier properties are increasingly vacant as they don't meet the code requirements for Section 8 subsidy, and the landlords cannot afford to cut the rent to let the market fill the units.
My point is that there are no easy fixes. SFO is a supply/demand problem and while supply is a problem, demand is too -- the outlier is that the extended gold rush is allowing tech companies to make irrational decisions with respect to employee compensation. The market has decided that it's cheaper to pay workers incredibly well than to move to Omaha.
I think the same applies to your single family home next to a 15 story condo building. Instead of selling to a another family, now they're selling to a big developer and can price it waaaaay higher, because the developer will be getting significantly more value out of the land than they were.
And still, they'll not want to do it. There's still farmers holding out, despite single digit million dollar offers for 10-ish acre plots. And it's great if a small number of them do hold out, because it makes it possible to have some green space down the line when the area has fully developed to a single family house level suburb.
But I think the main issue is the culture. Farmers want to maintain their way of life. Single family home people want to maintain their way of life. And so on. People don't like change.
> I think the same applies to your single family home next to a 15 story condo building. Instead of selling to a another family, now they're selling to a big developer and can price it waaaaay higher, because the developer will be getting significantly more value out of the land than they were.
I think the way to think about property values is this: what is the highest value economic activity that can be accomplished on the property?
In your first example, it's pretty clear that building lots of houses (in the presence of sufficient demand) is a much higher value economic activity than farming.
The home to condo example is a bit more complicated. For the very first person to sell to a developer, I think your point is sound.
However, each additional bedroom that's created in the city decreases the value of all other bedrooms by a small amount. This not only directly decreases the value of a single family home, but it also decreases the value of a condo building, which means that developers will be willing to play less money for land.
Eventually, builders will stop building - the cost of construction will be more than they can sell new condos for. At that point, I believe the remaining home owners will have suffered a dramatic decrease in the value of their property.
Where does the equilibrium land? I don't think anyone knows for sure. But new construction goes up in some pretty low value real estate markets. 80-90% is just a guess on my part, but I don't think it's too far off based on current prices.
Another thing to mention is that the remaining single family houses will have a different kind of value once they become rarer. Owning one of the final single family houses in San Francisco is the ultimate flex. You still have a backyard; you can still walk to things. So some super-rich person will come knocking and want to buy just as a status symbol or as a way to get the way of life they want but still in the city.
No - the problem is too many people.
Toronto accepts a vast array of newcomers every year - there is simply no need for it.
The number of new people is existentially problematic, it's not normative in any sense, and it's a self inflicted problem.
This is simply not true.
Almost all of the influx is due to migration into Canada. The government absolutely controls those numbers.
Of course, that's only sane if the cost of leaving it empty is very low. Which is indeed the case.
I lived next to some church property that was similarly blighted: the church paid little or no taxes and wasn't fined for having the property in disrepair. The congregation had all fled to the suburbs. So what was the incentive to put in work finding someone to rehabilitate and then buy or rent the property?
The value of the property for loan collateral is based on rental rates and assessors understand vacancies happen. Therefore it makes more sense to have some vacancy to trade up for a higher rental rate.
Given how leveraged commercial real estate companies are it wouldn’t surprise me to learn that they optimize around this rather than true cash flow.
A new residential apartment building goes in with 300+ units; leases to 70%, but 2 of 3 shops/restaurants closes/moves to the next high rise at the 1 year mark for lease renewal.
There's also a strategy of waiting for rent prices to appreciate enough before leasing to corporate clients. You could get 10y $1000/mo from a small time coffee shop, or you can wait 5 years and maybe get Starbucks locked into a 10y, $5000/mo lease after the area grows up a bit.
Similarly, 14th St in DC even just a few years ago was becoming a vibrant, fun spot to shop, drink, and eat in. This was after years of neglect in the area. Over the last year or so though a string of bars and shops have closed and all been replaced with banks. Capital One Cafes, Citi, etc. I have no idea how all these banks are functioning (I thought brick and mortar banks were on their way out?) but it's a damn shame.
No clue if it is actually financially beneficial for the renter but many believe it's beneficial to keep a store empty to wait around for a big company to want the property rather than committing to a small entity who can't pay big company rates.
Tenants also make the building more difficult to sell, if you are trying to sell.
Another somewhat related problem that I know happens in NYC is a building is owned by a parent who dies and leaves the property into split ownership amongst the children. Then the children cannot agree on a strategy to rent the building. And the fight results in an empty property.
What you gain from leaving the building empty is that you can sell to a big guy who wants the whole space. He won't do that if you give him six out of ten units and say "The other guys move out in five years" especially since the other guys will fleece you on buyout.
Not to mention San Francisco has a massive pension liability in excess of $6 billion. The city really is bankrupt.
And during the longest economic expansion in US history the city has done virtually nothing to shore up its finances. Not like San Fran is alone in that regard.
For comparison NYC has a budget per resident of ~$9,500. But don't let that fool you into think NYC has it figured out. The city is nearly $200 billion in debt and will probably go bankrupt if there is another big recession.
It's ponderous how some of the wealthiest cities in the world can't manage themselves. How do they not sweep out the current administration, and bring in people willing to change things?
Please propose a fix for dealing with the homeless population of the entire country on a budget that is mostly pre-allocated by propositions with no ability to raise taxes.
Nobody really wants to address the elephant in the room because they're all Temporarily Embarrassed Millionaires who might hypothetically benefit from Prop 13 someday.
I mean, you have to step over homeless encampments to walk down the street, but at least you don't have to pay more taxes!
The harsh truth is that if voters want to find the source of the problem instead of a scapegoat they should look in a mirror.
So this is what we get.
Washington D.C. has a large percentage of homeless people than SF. It has been documented that other cities will buy bus passes for homeless persons to get them to California cities or other places like Portland, Oregon. It's a nationwide problem and it feels like the places trying to help the most are the ones getting flak for it.
You simply can't fix this problem from 1 or 2 states - or a few well known cities.
Maybe it's a good thing, not for me to say, but that does seem like a very clear indication of mismanagement.
I've read that some building/condos/whatever have HOA's that require them to fund it. I'm not providing an opinion. I just found it surprising, if true.
The final straw for me, was when a bullet came through the wall of my bathroom at 1AM and when I called the cops they took 2 hours to get there, threw the bullet in a ziplock bag, then never called me or had any follow up. If this city doesn't take gun shots or violent crime seriously, then what good is the government or PD?
Those countries being under-developed African or Central Asian republics along with the various island nation-states. Right around Zimbabwe level.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nomi...
If you want to compare GDP, SF is in the top 20-30 countries according to your own link
[1] http://hsh.sfgov.org/overview/budget/
[2] https://www.sfchronicle.com/bayarea/article/New-S-F-police-h...
You don't know the half of it.
For one example we have allowed ourselves to be bamboozled by PG&E out of our own (literal electric) power since circa 1925... http://www.foundsf.org/index.php?title=The_Hetch_Hetchy_Stor...
"But walk through parts of San Francisco today, and you get a different sense altogether: not an uncanny effectiveness, but a panicked swirl of homeless capital."
What is meant by "homeless capital"? does it mean SF is the capital city for homeless like Washington DC, or does capital go to opposite of venture capital, like in banking/finance/Wall St?
There are a lot of homeless people in San Fransisco. Nothing else needs to be construed.
I take it to mean capital (in the banking/finance sense). So "homeless capital" might suggest that there is more invesment money available than there are good places to invest it.
The desire to minimize the cost of owning a property should create an incentive to ensure a residence is occupied by at least one person who can pay, so the statutory minimum would probably be set such that renting at below-market rates would be slightly less costly after taxes and insurance than the tax rate for a vacancy.
I mean look at NYC - property taxes are really high there and the rent is almost as high as SF, and higher than LA.
Here's a background piece that covers most of the history and issues: https://www.businessinsider.com/san-francisco-housing-crisis...
TL;DR: It's complicated.
Also (and especially for those of us from the Old World) remember that SF is ridiculously young as cities go, even for American cities. The continent was largely settled from East to West. The Western part of the city was sand dunes and scrub. People panned for gold next to Lake Merced.
Here's a thing from 2016 "Employment, construction, and the cost of San Francisco apartments" : https://experimental-geography.blogspot.com/2016/05/employme...
He got some data:
> I set out to replicate the DataBook's methodology over a wider range of years, but quickly gave up on including just two-bedroom apartments, because ads in the early 1960s rarely referred to apartment sizes in these terms. Instead, for each first Sunday in April from 1948 through 1979, plus a few other years, I made a list of all the advertised unfurnished apartments, flats, houses, and, later, condos, regardless of size, that were advertised in the Chronicle. Mostly I used the San Francisco Public Library's page scans of the newspaper but resorted to microfilm for the few later years where no page scans are available.
Here's the main take-away:
> in 1956, apartments began to be listed in increasing numbers, but their prices also began to rise. Overall, they went up 6.6% every year. Today's outrageous prices are exactly in line with the 6.6% trend that began 60 years ago.
So, big long complicated history, dead simple stable 6.6%/year increase.
- - - -
Solutions: Bucky Fuller mega-city Old Man River City
https://en.wikipedia.org/wiki/Old_Man_River%27s_City_project
https://solutions.synearth.net/2002/11/24/
Look at the cross-section: the structure is hollow. It's built like a suspension bridge. Imagine rotating the Golden Gate bridge around a vertical axis though its midpoint. See the article for the rest of the description.
Integrated with ecologically harmonious waste reclamation and "bioreactors" to make arcologies: https://en.wikipedia.org/wiki/Arcology
A few of these in the CA Central Valley on the Sacramento river would take all the housing pressure off the cities.
https://www.investopedia.com/terms/r/rentalreal-estate-loss-...
Of course this is based on owners with deep pockets that can benefit from this, and not the rest of us that might actually need that rental income; but like they say, the rich get richer...
This is not true.
https://www.investopedia.com/terms/r/rentalreal-estate-loss-...
> who claim that they need the new rental rate
They don't claim that, they want it (greed)
If you want to prevent emptyness, it's better to directly fight that. E.g. say that the government will set a rental rate after 12 months of no renter. That will force property owners to set a fair rent that the market will bear or risk the government setting it at way lower rate.