Eric Von Berg - Newmark Realty Capital - 595 Market Street, Suite 2550, San Francisco, CA 94105 - for loan quote: 415 956 9922

May 31, 2014

Protesting Google’s buses is insane

It's time for Google to fight back by funding urban housing... in downtown San Jose!

The well-publicized media events where “activists” block and board Google buses in San Francisco’s Mission District set me off.  These events lead to the requisite articles about how high-paid tech-workers are driving out San Francisco’s low-income households and leading to Ellis Act evictions. The headlines scream "evictions up by 170% in 2013 from 2010"… but rarely mention the grand total was just 116.
Why do these protests frost me?  Let me count the ways...
  1. This is not about San Francisco, it is about the Mission!  The Mission District is becoming a desirable place to live.  Desirable neighborhoods become expensive.  If you have limited means you don't generally get to live in the district of your choice.  I would like to live in Pacific Heights, but I cannot afford it.  Activists, how about moving into the Bayview or the Crocker Amazon and make those neighborhoods hip and desirable?
  2. Old time San Franciscan’s already have uniquely strong protections against being priced out!  Unlike most major cities in America that have freely operating real estate markets, San Francisco has (1) Prop 13 to help homeowners avoid rapidly escalating real estate taxes if their homes jump in value, and (2) rent control over the majority of SF’s rental stock.  Yes, renters are accepting buy-outs from landlords, some as high as $40,000 to move, but these are voluntary transactions, entirely at the tenant’s option.  Ellis Act evictions are up from the depths of the economic collapse, but so are the number of sales, rent levels, home values and all other measures of real estate activity.  Ellis Act evictions are still very rare, annually accounting for only 0.05% of the total San Francisco rental stock. Also, these Ellis Act units do not disappear:  They are housing for the owner’s relatives or converted to TIC ownership, which is the entry housing option for many renters trying to move into home ownership.  
  3. Who are these “activists” anyway?Although the news stories are about long-time San Francisco residents of limited means; the angry protesters are not long-term residents.  They are generally young hipsters who are the same age as the tech workers.  These young people want to live in hip neighborhoods for the same reasons.  The difference, they studied the wrong subjects in college and are now part-time activist baristas.   Activists having special sway with the media is a San Francisco phenomenon; “I hold no public position or office. But my voice counts more than your average voter! Why? Because I am an angry zealot.”  

Yet the Google bus controversy highlights an important issue

The Bay Area’s largely car-centric suburban housing stock does not meet the needs and desires of its influx of millennial in-migrants.  The Bay Area needs a genuine urban alternative to San Francisco.  Downtown San Jose is on the cusp of meeting this need.

Downtown San Jose is at the inflection point of becoming a hip and vibrant place.  See this excellent recent report by SPUR about the emergence of Downtown San Jose:  .

Jerry Brown killed the skimming of tax increment by redevelopment districts.  San Jose was one of the most aggressive skimmers, creating massive, interlocking redevelopment districts that allowed it to use the tax increment from all of the business development in North San Jose’s Golden Triangle to fund projects downtown.  The redevelopment punchbowl was taken away but not before the City spent over $2 billion dollars in redevelopment funds in Downtown San Jose on transit projects, museums, parking, an arena, convention center, parks and street beautification.  Downtown San Jose is safe, clean and beautiful but it is a ghost town after 6 PM.  The 200+ restaurants and bars downtown struggle when it is not Sharks Hockey night.

Without the redevelopment slush fund, San Jose’s city planners are being forced to do what makes sense; incentivize the free-market to bring in high-rise housing to populate its downtown.  A few thousand young, well paid tech-workers living, eating and hanging out downtown will change everything.  Yet the City should not allow a bunch of low-rise, stick-built apartment houses to spring up downtown.  Transit oriented development makes sense only if it is dense: San Jose should demand minimum height limits downtown and continue its current economic incentives for high-rise residential developments.

The Cash-Rich Employers of Silicon Valley should fund high-rise rental projects.  High-rise construction requires developers to meet Type-1 fire safety codes.  This means buildings that don’t burn made of concrete and steel.  Type-1 is expensive construction in earthquake country.  Until very recently the only residential buildings that could afford this type of construction in Downtown San Jose were luxury condos (And, most of these projects still when back to the banks).   Apartment rents in San Francisco are now high enough for Type-1 construction, but San Jose’s rents are not quite there.  So the City of San Jose gave some temporary breaks on development fees for high-rise residential and temporarily suspended inclusionary housing requirements.  As a result two apartment towers are under construction in Downtown San Jose.

But, these City incentives will expire at the end of 2014.  Likewise banks are starting to lose their fear of funding condo projects.  Condo developers historically outbid apartment developers for land.   Luxury condos miss the mark, Silicon Valley’s young newly hired tech workers seek apartments to rent.

Google, Apple and the other cash-rich Silicon Valley employers should create venture funds to back high-rise, transit-oriented apartment projects.  These would not be corporate housing projects. These apartments would be market-rate, open to any renter.  If a developer can propose a project that can achieve an initial unleveraged return equal or higher than a current cap rate, say 4.5%, these tech giants should fund the equity for that project.  These tech companies would show they are helping solve the area’s housing problems.  They will earn 4.5%+ on their excess cash, far better than they are earning today.  And they will not lose money.  They can sell the projects or their positions upon completion to restock their transit-oriented housing incentive fund and likely make a tidy profit.

Google forget San Francisco!  Go to the genuine urban alternative that will accept your tech workers with open arms, downtown San Jose!