Pierre-Auguste Renoir: Houses in a Park, c. 1911. Image in Public Domain
For local jurisdictions to reach their Housing Elements’ lofty targets for new affordable housing units, private investors must perceive reduced risk and a higher potential for payoff, says SF real estate firm director K. Cyrus Sanandaji. Sanandaji proposes in the SF Business Times that cities reform roadblocks to housing construction—like burdensome permitting processes—in order to jumpstart private sector developments.
San Francisco can only solve its housing crisis by encouraging investment, fostering a vibrant economy, and making it feasible to produce housing within a reasonable timeline. Unless the city is going to single-handedly, fully fund all 82,069 units with tax dollars, meeting the Housing Element goals will require private-sector investment. While it would be wonderful if capital were motivated by social good, patriotism, or a love of San Francisco, it is not. We must acknowledge that investors seek to optimize for risk-adjusted returns. It is important to recognize how the basic math works.
Sign up to receive updates on Opp Now articles. Click HERE.
The equation is simple: the profitability of an investment is measured as a function of revenue over cost. If either side of this equation skews — building costs balloon and/or revenues (in the form of rents) shrink -— then the return thresholds are compromised, and the project is deemed infeasible. In addition, the greater the perception of risk associated with building housing, the greater the expectation of return on capital, because investors can find the same returns for less risk in housing elsewhere, or invest in other sectors.
Progressives can argue that profit margins should be lower in development. But in the reality of economics, they would need to reduce risk to make that happen. Eliminate risk by reforming the system and making it easier to build, and investors will happily embrace thinner-margin deals.
Increasing supply will help to reduce prices, making housing more affordable for all. Fees generated by market-rate development will finance affordable housing. But we need to agree on the roots of the problem. The Mayor and Board of Supervisors must pursue reforms focused on enhancing supply instead of restricting demand.
This article originally appeared in the San Francisco Business Times. Read the whole thing here.
RELATED:
- The surreal way we build affordable housing
- Hotop: How to resolve SJ’s Housing Preservation/Development dilemma
- How “preserving” affordable housing misfires
Follow Opportunity Now on Twitter @svopportunity
