Rental Housing Crisis in the San Francisco Bay Area: Causes and Solutions
By Stephen Barton
The San Francisco Bay Area is an economically successful region with a growing population and a severe rental housing affordability crisis. The fundamental cause of this crisis is treating rental housing as a market commodity, meaning that it is produced for profit and rented to whoever pays the most. Even with the Bay Area’s extremely high rents, the market fails to build enough new housing and allows older housing to deteriorate. These harmful effects are visible in the history of rental housing from the end of World War II to the present day. The path out of this crisis requires coordinated use of three strategies, each of which has its strengths and weaknesses: rent control, rental assistance payments for all low income tenants, and capital subsidies for creation of socially owned, not for profit housing, through both construction of new housing and through acquisition and rehabilitation of older housing.
Standard economic theory claims that when there is a shortage of something as essential as housing, the market will automatically produce enough additional housing to end the shortage. In this idealized market, when housing is scarce people who need housing will pay higher prices for it, the higher rents make owning rental housing more profitable and because it is more profitable, developers will build more of it until everyone has a home. But in the real world, the nature of rental housing is such that rising rents will not increase the supply enough to meet the need.
There are three main reasons for this disconnect. First, the market can only increase the supply of new rental housing, which usually has the highest rents and serves higher income people. The Terner Center for Housing Innovation at the University of California currently estimates that in the Oakland area, building a mid-rise rental housing development will become profitable at rents of around five dollars per square foot, or about $4,000 per unit per month. This is affordable to the highest income 30% of area renters and perhaps within the reach of the top 45% if they are willing to spend half of their income for rent. Once developers produce enough housing for these higher-income tenants, they stop building. It is simply not profitable to build more housing for the increasing number of low-wage workers who can’t afford new housing rents.
It is still important that this expensive new housing gets built, because otherwise more high income tenants will displace lower income tenants. (New high-density housing development may also displace lower income tenants if it involves demolition of older, lower density rental housing.) Some higher income tenants will move out of older buildings into new housing, freeing up homes for lower income tenants, but this slow “filtering down” process is far from meeting the need. Accessory dwelling units, manufactured apartment modules, and other efforts to lower the cost of new construction are also helpful, but marginal in their overall effect.
Rising rents in the older housing will not result in building additional housing as long as these rents remain below the $4,000 a month necessary for new construction to be profitable. Apartments that once rented for $1,500 a month may now rent for $3,000 a month, but this is still not enough to persuade a developer to build more apartments in most of the San Francisco Bay Area. Instead, the growing population of tenant households with incomes under $100,000 a year must compete for a largely fixed supply of older housing, and the result is major rent increases that create windfall profits for landlords instead of more housing.
Second, rental housing requires both a building and land to put it on—a location. It is easier to construct additional buildings than it is to create additional locations, so locations in desirable areas are inherently scarce. Making land use regulations less restrictive can help somewhat, but a recent Freddie Mac study indicated that in the Bay Area geographic constraints had twice as much effect as restrictive land use regulations. Within a fifty mile commute radius around downtown San Francisco 75% of the area is under water or on steep slopes. Increasing the supply of housing in desirable locations requires building at higher densities, and tearing down older low-rise buildings to build higher further increases the expense of new construction. This allows the rents in older housing to rise even higher before they face competition from new housing.
Third, the market does not ensure that the real estate investors who own older rental housing will maintain it. Very low income tenants in the Bay Area often live in substandard conditions while paying rents that would be well above average in other parts of the United States. This is because for-profit landlords who own aging buildings too often choose to maximize their cash flow by reducing what they spend on maintenance and allowing their buildings to deteriorate. This tactic succeeds because buildings are durable, lasting for many years despite neglect and poor maintenance. These landlords take advantage of the fact that low-income tenants have few alternatives open to them, usually equally bad. The result is a steady and quite unnecessary deterioration and loss of older, more affordable rental housing. Ironically, if the market did produce enough new housing to drive down rents, it would certainly trigger an even greater wave of disinvestment within the older rental housing stock as landlords tried to reduce maintenance costs to keep up their cash flows and make their mortgage payments to avoid foreclosure.
This model of the limitations of the rental housing market is validated by the historical record. Housing in the United States greatly improved in the thirty-five years after World War II, when rising incomes, automobile ownership, and highway construction led to rapid suburban housing development, increased homeownership and lower real (inflation-adjusted) rents nationwide. But this period also saw extensive deterioration of rental housing in central cities, much of it driven by racist panic over non-white renters moving into areas where rentals were vacated by white renters who bought houses in the suburbs, even when the new residents could pay the same or higher rents. Since the late 1970s incomes have stagnated except at the top and real rents and rent burdens have consistently increased, along with homelessness. Nationwide, real rents increased by 50% between 1980 and 2020. In the San Francisco Bay Area rents were up 100% by 2020 and are among the highest in the U.S.
The solution to the rental housing affordability crisis requires coordinated use of three strategies: rent control in older for-profit housing, rental assistance for all low income tenants and socially owned, not for profit housing.
Rent control limits the unnecessary rent increases in older rental housing that simply create windfall profits for real estate investors. Along with requirements that evictions be done only for good cause, rent control offers tenants greater stability and reduces displacement. Better yet, it does this at minimal cost to local governments, since implementation can be paid for by fees charged to the real estate industry. However, rent control alone cannot end the affordability crisis. Stable rents cannot compensate for unstable incomes and precarious employment. Exempting newly constructed rental housing for a reasonable period allows new market-rate development to continue unhindered, but does nothing to meet the need for additional housing affordable to low income renters. In California state law allows rents to go to market whenever a tenant moves, with rent control restarting at this higher rent for the new tenant. It also exempts single-unit properties and apartments built after 1980 (for older rent control systems) and after 1995 (for newer systems). As more new rentals are built and older rentals demolished, rent stabilization benefits a declining share of rental housing in the Bay Area’s rent stabilized cities of San Jose, San Francisco, Oakland, Berkeley, Richmond, Mountain View and East Palo Alto. Efforts to loosen state restrictions on local government rent controls continue.
Rental assistance payments, currently provided to only one-quarter of eligible low income households, would greatly improve the lives of those spending the majority of their income for rent and reduce evictions and forced moves, especially those with precarious employment. Its major limitations are that it would likely drive up rents even more in tight markets and do little to increase housing production, since the subsidized rents would remain below the new construction threshold. Making rental assistance an entitlement, available to any qualifying tenant right away rather than only after spending years on a waiting list, would require a $60 billion annual increase in the Federal housing budget. This would be easily doable with the political will, but is certainly unlikely in the foreseeable future. Local governments can fund some emergency rental assistance, but limited local tax resources, periodic fiscal crises and balanced budget requirements make it too risky for them to fund ongoing rental assistance.
Capital subsidies, upfront payments that are enough to cover all or a major part of the cost to build or acquire and rehabilitate rental housing allow social housing organizations to increase the supply of affordable housing and rescue older, deteriorating housing. With sufficient capital subsidy to cover development costs, housing can then be rented at the cost of ongoing operations and maintenance, typically well under $1,000 a month. This is within the reach of all but the lowest income tenants, who would need rental assistance as well. When the subsidy is only partial, so that part of the cost must be borrowed, then rents must be set higher in order to repay the loan. Social rather than for-profit ownership ensures permanent affordability so that the benefits of the capital subsidy would not evaporate after thirty or fifty-five years.
Development of socially owned housing is mostly paid for through Federal Low Income Housing Tax Credits and state and local bonds. There are also local efforts to recapture some of the unearned profits of the real estate industry. One widespread approach is to require for-profit developments to include some below-market rent apartments or pay into a low-income housing fund. Berkeley and East Palo Alto increased the percentage of rent receipts that landlords pay as business license taxes. San Francisco and Berkeley increased the transfer tax, in effect a sales tax, on the more expensive real estate sales. San Francisco and Berkeley also tax units that are held vacant for more than six months during a year. All of these taxes support social housing and homeless services.
Creation of socially owned housing is expensive, but as long as it is well-managed it provides permanent affordability and if enough is created it will provide a check on the worst tendencies of the for-profit rental housing market. Public housing was once the major form of social housing, but it proved vulnerable to political hostility and neglect that allowed much of it to deteriorate. Non-profit housing development corporations are currently the most successful form of social housing in the Bay Area, with over 60,000 units of mostly new construction in buildings with 40 units or more. The vast majority of existing rental housing is in buildings with less than 20 units and there is a tremendous need to preserve as much of it as possible as permanently affordable housing. Community land trusts (CLTs) offer a path for acquisition and rehabilitation of this smaller rental housing and its conversion to permanently affordable homeownership. They hold ownership of the land under buildings of any size, from single family to apartment buildings and can support the buildings’ conversion from rental to single-family or cooperative homeownership. CLT ownership of the land ensures continuing affordability and an ongoing relationship with the residents, who generally need the continuing support that is too often missing from other forms of affordable single-unit and cooperative homeownership. At present, with under 1,000 units in the Bay Area, CLTs are a small, relatively new but promising part of the social housing movement.
The non-profit housing developers and community land trusts believe that housing should be a human right, a goal that in the best case will take decades. That should not discourage people from continuing the work of creating more social housing. The affordable housing crisis will continue until social housing is a major part of the overall housing supply.
This is a condensed version of a longer article that is available upon request. Please contact stephenbarton@live.com.
Stephen Barton is on the board of the Bay Area Community Land Trust. He was formerly Housing Director for the City of Berkeley. In retirement he led a successful campaign to increase taxes on for-profit landlords to raise money for permanently affordable housing and homelessness prevention. He holds a Ph.D. from the University of California, Berkeley and is the author of numerous articles on housing policy.
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