Affordable-housing quotas imperil new S.F. building projects, study says

The Brady, a market-rate apartment building at 12th and Market streets, is part of a larger multiuse development on the centrally located site.

The Brady, a market-rate apartment building at 12th and Market streets, is part of a larger multiuse development on the centrally located site.

Yalonda M. James, Staff / The Chronicle

San Francisco’s quotas for affordable-housing units in new construction projects are a major factor making the vast majority of them economically unfeasible, according to a study that strikes at the heart of city housing policy.

The study — conducted for a city advisory group — casts further doubt on the city’s ability to meet a state mandate for 82,000 new units to be built by 2031, and underlines the continuing struggle to ease the housing crisis. Even eliminating the quotas would not guarantee that developers would deem new projects profitable enough to undertake, the study shows.

“We’re so underwater here, I don’t know what I could be saying to be productive,” said Eric Tao, who reviewed the analysis two weeks ago with fellow members of the Inclusionary Housing Technical Advisory Committee. Based on the study, prepared by a real estate investing firm, “the city should be paying us developers to build housing,” said Tao, managing partner of developer L37 Partners, during the review. “I mean, it’s ridiculous.”

For decades, the city’s Inclusionary Housing program has required that developers incorporate some affordable units into their market-rate projects — or pay for those units to be built elsewhere — as a way to ensure that homes for rich people aren’t the only ones getting built.

The eight-member committee, made up of real estate and development experts for market-rate and affordable housing, was formed by the city to monitor the policy’s effect on housing construction. The committee now must decide whether to recommend to the Board of Supervisors that the policy be changed.

“The feeling in the room is, dropping the inclusionary percentage” lower is needed, said committee member Whitney Jones, deputy director of operations at the Chinatown Community Development Center. He and others stopped short of saying how far to lower the requirements, which vary depending on the size of the project.

The finding of the study, conducted by San Francisco-based Century| Urban, calculated costs of 40 hypothetical projects for both rent and sale, including the price of land acquisition, design and construction, city fees and the lower revenue generated by affordable-housing units.

Of all 40 scenarios, only four, all of them ownership-based, penciled out while satisfying the inclusionary program. Many of the projects that were designated as feasible, or came close to it, were smaller. That could be because larger structures use more expensive union labor and tend to contain advanced safety systems, like elevators that can operate during fires, said Strachan Forgan, principal at SCB, an architecture and design firm.

Among the 20 that were rental projects, only one was shown to be feasible, but it did not satisfy the city’s mandatory inclusionary policy. While not yet ready to make recommendations, the committee members accepted the findings as accurate. Multiple development experts who reviewed the analysis for The Chronicle said it appeared to be well done.

The analysis did not look at possible methods for reducing project costs, such as employing cheaper labor or using a modular approach that constructs much of the housing off-site in factories. Century| Urban declined a request for an interview.

With affordable-housing requirements so ingrained in a city with sky-high rents and home prices, the committee’s findings are likely to be controversial.

“Developers only want to lower inclusionary so they can make more money, and that’s always their goal,” said Sarah “Fred” Sherburn-Zimmer, executive director of the Housing Rights Committee of San Francisco, a tenant-advocacy group.

She also said it seemed premature to weaken the inclusionary requirements, one source of precious low-income housing.

“They’re penciling it out at this odd point in time when interest rates are high,” alongside other elevated costs, she said. “That’s not going to be the situation in two years in San Francisco.”

If San Francisco is to meet the state’s demands, it must build about 10,000 housing units per year, or twice the construction pace of its best years. If it doesn’t hit its targets, the city could lose state money and control over its housing approval process, giving developers wide latitude to build what they want, where they want.

Many committee members said that, based on the analysis, the situation was so dire that watering down or even ending the inclusionary policy wouldn’t be enough to immediately put shovels in the ground. Other policy changes should be on the table to encourage construction, like reducing or delaying the fees to the city that cover projects’ local impacts, or speeding up development in a manner similar to what voters rejected in November.

At the committee meeting, member Sarah Dennis-Phillips, senior director at real estate developer Tishman Speyer, floated reducing the inclusionary program’s requirements on stalled projects, containing thousands of housing units, that have already received some level of approval from the city and might revive if they become less costly to build.

That type of path presents a problem, Jones said: “If you cut inclusionary too significantly, that puts us out of line for our (state mandate).”

That’s because San Francisco must satisfy more than half of the state’s housing goal with low- and moderate-income units. If fewer come from market-rate projects, how else will they be built?

City Hall should spend more money on fully affordable housing projects, said committee members Peter Cohen and Fernando Martí, former co-directors of the Council of Community Housing Organizations, a coalition of groups representing affordable housing developers and tenant advocates. A potential funding source is the city’s real estate transfer tax, increased by the passage of Proposition I in 2020, Cohen and Martí said.

If the city wanted to buy land, “now is the time to do it,” Martí said. Century| Urban’s report estimated that the cost of land where construction is not already planned is now lower than during the 2011-2013 period, following the Great Recession.

New funding sources, like an affordable-housing bond or tax measure on the next ballot, are also necessary, Cohen said. The difficult economy might make that an easier sell to voters — even to the “comfortably housed,” like homeowners who say, “I have kids, they left and came back and they can’t afford to live in San Francisco,” Cohen said.

The city should also consider policy changes that would quicken and reduce the price of affordable-housing construction, said Rebecca Foster, committee member and CEO of the Housing Accelerator Fund. To qualify for city dollars, a project must use contractors that meet strict criteria, and when they’re hard to find it can increase costs.

“The regulatory burden that we place on getting affordable housing funded — I haven’t seen anything like it anywhere else in the country,” Foster said.

Noah Arroyo is The San Francisco Chronicle’s lead SFNext reporter. Email: