San Francisco’s Housing Crisis Is a Product of the Regulatory State

And it’s not just one regulation that makes the city expensive. It’s all of them.
April 8, 2019

San Francisco’s median home value is now at $1.3 million, and there’s a growing bipartisan consensus on how it got so expensive. The city’s in high demand, due to its desirability and tech growth.  And locals—embodied by the YIMBY movement—are starting to see how regulations worsen the problem, by blocking new housing supply from meeting the demand. The question, though, is which regulations have the most impact. Well, so many of them exist that the answer is complicated.

The regulation most often blamed is zoning. All of San Francisco is under a restrictive code that prevents high densities. Central neighborhoods like Nob Hill and The Mission District are relatively lax, allowing the mid-rise urbanism that makes San Francisco special. But a vast majority of the city is zoned for low-rise residential, such as single-family and duplex housing.

If this zoning code were thrown out, and land developers throughout San Francisco could build to meet consumer demand, much of the central area would likely get “Manhattanized” with towers; and much of the outlying areas would morph from sprawl into mid-rise multifamily buildings. This latter outcome is the goal of SB 50, a housing bill recently proposed by State Senator Scott Wiener. It would allow mid-rise density to be built throughout California near areas with jobs and transit. The bill would effectively rezone all of San Francisco, but until it passes, the city’s zoned capacity will remain low.

But much of what prevents more housing in San Francisco isn’t zoning, per se, but general “process.” According to a recent San Francisco Examiner piece, many projects take years to get approved.

“From the moment you write the offer to buy a piece of land it probably takes close to a year to submit your plans,” said Sean Keighran, president of the Residential Builders Association. “Then you’re in planning for two years—then you have [to obtain] your post-planning entitlements and then you have to build…So from the time you bought the land, five years passed.”

For large projects, this process can involve community benefits agreements that add major costs. The agreements often mandate housing affordability set-asides, prevailing wage laws, local hiring requirements, or public service provisions that have nothing to do with the development, such as when Twitter funded homeless services near its headquarters. San Francisco also has permit fees, which are famously high in California. Some projects die from all these demands, but even if they win entitlements, developers will find they need to sit on the properties because economic and financing conditions have changed.

State laws present additional hurdles. Take the California Environmental Quality Act (CEQA), which was passed in 1970 to prevent localities from approving environmentally-harmful developments. The law has since become a standard form of obstruction used by special interests to win regulatory capture. Unions use CEQA lawsuits to make developers hire them for projects. NIMBYs use them to block housing in their neighborhoods. And developers use them to stop rival developers from building. One study found that 98% of housing units targeted by CEQA lawsuits were in urban infill areas, which is ironic, since this obstruction forces development to sprawl out, thus countering CEQA’s basic environmental goals.

One example of these separate regulatory forces combining to stop a San Francisco development was profiled by Reason Magazine. Robert Tillman owned a laundromat in the Mission District that he spent 5 years trying to redevelop into a 75-unit building. He spent 3 years getting it through the planning commission. After they approved it, a neighborhood group used CEQA three times to block the project, using the final appeal to complain of the shadows the building would cast. The project finally got reapproved last year, but only after Tillman spent $1.2 million in studies and legal fees.

Stories like this—along with other factors, such as tough geography and high labor costs—show why housing in San Francisco is so expensive. It’s not just that zoning and approvals prevent new supply from entering the pipeline. But the housing that does get built has often endured Kafkaesque political processes that cost 7-figures to navigate. These costs get passed onto the consumer, raising the final sticker price of units that were in short supply to begin with.