The slowdown in new market-rate, residential development is starting to take its toll on San Francisco's affordable housing pipeline, as rising construction costs and a softening market are resulting in less money flowing to the city programs that support affordable projects.
The amount of fees that market-rate housing and office developers pay into the city's affordable housing fund has plummeted 70% from the high in fiscal year 2015-16, declining from $111 million to $35 million in the current fiscal year.
Kate Hartley, director of the Mayor's Office of Housing and Community Development, said the decline isn't surprising, because market-rate developers have become more cautious about breaking ground on new buildings.
"It's pretty well documented that the market-rate development has slowed," Hartley said.
While the slowdown doesn't affect the current crop of affordable housing projects — money has already been set aside for projects that are approved and being started this year — it could delay developments that are in the design and review stages.
Fernando Marti, executive director of the Council of Community Housing Organizations, which advocates construction of affordable housing, said the city has postponed seeking bids for several new projects, namely 180 Jones St., slated for about 60 units, and the site above the new Central Subway station at Fourth and Folsom streets, set for about 75 units.
"There are a few projects that are a little iffy as far as where the money is going to come from," Marti said. "These are projects that we expected the city to put out (requests for proposals) on, now they are telling us to wait a little bit."
Down the road, delays in other market-rate projects could hurt more affordable developments, said Don Falk, executive director of the Tenderloin Neighborhood Development Corp.
In particular, the developer of a huge 960-unit complex planned for the South of Market site of the Creamery restaurant at Fourth and Townsend streets has committed to paying $70 million in affordable housing fees, money that is earmarked to fund more than 300 affordable units at Fifth and Howard streets. But the Creamery project has been delayed by several lawsuits over the Central SoMa neighborhood rezoning plan passed by the Board of Supervisors in December.
Falk called Fifth and Howard "the poster child" for how affordable housing can be dependent on the often fickle marketplace.
"Fifth and Howard can't get funded unless the Creamery goes forward," Falk said, adding that even with the $70 million there is a $12 million funding gap, he said.
The city's affordable housing fees come from three sources: jobs-housing linkage fees, which office developers pay to offset the public services needed for the city's growing workforce; inclusionary housing fees, which market-rate housing developers can choose to pay instead of including below-market-rate units in their projects; and neighborhood impact fees, which apply to parts of town that have been rezoned in recent years, such as Rincon Hill and the Market-Octavia area.
The fees have dropped in each of the past three fiscal years, from $111 million to $58 million to $50 million to $35 million.
But Hartley said that the department has enough money, about $441 million, to fund the projects planned for the next fiscal year.
That money will help pay for four big Mission District projects totaling 500 units — $25 million for 490 S. Van Ness Ave., $40 million for 1950 Mission St., $28 million for 2060 Folsom St., and $39 million for 681 Bryant St. It will also go toward rebuilding Potrero Hill and Sunnydale public housing. And $59 million of it will pay for for 178 units of both senior and family housing at Broadway and Davis Street on the northeast waterfront.
But while market-rate housing developers are pumping less money into city coffers, affordable housing will benefit from increased political and philanthropic interest in housing the poor and working class.
In November, San Francisco voters passed Proposition C, a business tax that is expected to generate about $150 million a year for supportive housing. In January, Gov. Gavin Newsom announced plans to spend $2 billion on affordable housing in the next year. Also in January, a coalition led by the Chan Zuckerberg Initiative and the San Francisco Foundation established a $500 million fund to support Bay Area housing.
In addition, Mayor London Breed has announced plans to put an affordable housing bond on the November ballot, most likely for $300 million.
"It's not all doom and gloom," Hartley said. "We are optimistic. There are a lot of resources. We just need to be creative and go after new opportunities as well as we can."
The decrease in fees generated by market-rate projects has prompted some pro-development groups to push for lower inclusionary housing requirements, arguing that some projects are stuck because the fees or on-site requirements are too high.
In 2016, San Francisco voters passed a proposition that increased the portion of buildings subject to affordable housing fees from 20% to 30%. Developers pay about $200 per square foot on that portion of the project — so for a 100,000-square-foot rental housing development, the fee would be about $6 million.
Kristy Wang, policy and planning director at the urban think tank SPUR, said that lowering those fees isn't something the current progressive-majority Board of Supervisors is likely to support.
"There are reasons to do that, but it's hard to picture this board dialing back any affordable housing requirements at this time," she said. "Even with the evidence ... it would be a hard public conversation."
While private developer fees are important, especially when they're not being generated, Falk of the Tenderloin Neighborhood Development Corp. said, they will never be the main source of investment for affordable housing.
"The truth is that affordable housing requires a public (tax) subsidy," he said. "We need subsidies to make up for the marketplace's failure," he said. "Inclusionary plays an important role, but compared to other funding sources, it's not a very big number."
