City Struggles With Rental Housing Glut

Is Prop M a Solution or an Aggravation?

by Thomas K. Pendergast

•••••••••• November 7, 2022 ••••••••••

In the aftermath of the pandemic, San Francisco is facing a dramatically different housing situation than just three years ago when the technology sector was filling rental apartments with “techies,” but long-time tenants were feeling the pressure and getting priced out of the City.

Gone are the days when companies like Hubhaus were leasing properties and then chopping them up into smaller units to stuff as many techies into them as possible

Instead of a shortage, the City is now glutted with vacant rental units as an increase of 20,925 vacant units has driven the total number up from 40,548 in 2019 to 61,473 today, according to an SF Budget and Legislative Analyst (BLA) report released on October 20th.

Proposition M is on the ballot in tomorrow’s election, attempting to deal with this, which would impose a tax on landlords who keep their rental units vacant for more than 182 days. If passed by 2024, the tax would range from $2,500 to $5,000 per vacant unit, depending on the unit’s size. If still vacant by 2026, the tax will range from a minimum of $10,000 to a maximum of $20,000 for units greater than 2,000 square feet.

The tax would only apply to buildings with three or more units, and there are other exemptions as well, like Air B&Bs, which are not subject to the tax.

The City Controller’s Office estimates that at this point, the number of units subject to this tax would be just under 4,000 units.

The BLA report, however, has different categories of reasons why these units are empty, and number one is the “For Rent” category, which jumped from 7,241 in 2019 to 17,514 in 2021, an increase of 10,273 rental units. The second largest category is “Other Vacant,” which jumped from 12,991 units in 2019 to 21,493 in 2021, an increase of 8,502 units.

But the BLA report, which relies on statistics from the Census Bureau, does not clarify how many of these “Other Vacant” units are related to property owners “parking” their money — buying property as an investment but keeping them empty. These properties seem to be the main target of Prop M.

“The census bureau doesn’t specify any particular situation, but for such an increase in two years, it certainly could be that this is landlords waiting or trying to obtain rent that tenants aren’t willing to pay,” said Fred Brousseau, a co-author of the report. “They are identifying that these are units for rent at this time. So really, the story is in the comparison to two years prior and such a mushrooming in that category, so something dramatic has changed.

“The market doesn’t seem to be working in the way you would expect.

“If a family has decided to leave it vacant, there could be many explanations for that,” he said. “I know sometimes there’s just family disputes; this is owned by some siblings and they don’t agree on what to do with it, what the rent should be or how much they should sell it for.”

Fernando Marti has been a tenant housing advocate in the City for many years. “Something’s going on and clearly, the market isn’t responding the way it should. Demand has come down so prices should come down … But it’s not happening.”

Indeed, according to statistics from Jumper Real Estate, the average rent for a one-bedroom apartment has risen 7% just in the past year.

Howard Epstein is the vice president of the Small Property Owners of San Francisco Institute, and he offers another explanation for these other vacancies. “There are people, small property owners who own a set of flats. They live in one and rent the other ones,” Epstein said. “But over the years they’ve had so many problems with tenants and their building is now paid off.

“They’re retired. So, they don’t rent it because they don’t want the problems anymore.”

He disagrees with those who suggest the landlords are holding out for the techies to come back. “I think what they are trying to do is keep the rent that they were getting before because lowering the rent might not pay the bills. You’ve got property taxes, you have all kinds of fees, you have repairs.”

Janan New, executive Director of the San Francisco Apartment Association, also doesn’t buy into the “return of the techies” scenario. “That’s kind of a joke, isn’t it? My folks are in a really desperate situation right now. The housing market here hasn’t been this bad since, probably, the late 90s. So we are not holding units off the market waiting for another gold rush. We’re trying to rent, but the fact of the matter is there aren’t jobs in San Francisco. It’s a pure economic situation. I don’t see anybody hiring in a robust manner.”

Maria Zamudio is the Organizing Director for the Housing Rights Committee of San Francisco and she sees the current situation as the result of misplaced priorities. “The fact is that we are overproducing market rate housing while we’re significantly under producing at the price point people actually need. The impact of keeping units vacant is that it messes with the market pricing,” Zamudio said. “The reality is that we’re not building at the price points where the demand actually is, so we’re overproducing at price points that are outside of what folks can afford.

“Maintaining vacant housing impacts the market. It’s an artificial scarcity,” she said. “It’s not that community advocates don’t want housing. Another market-rate condo is not going to help the housing crisis.”

Zamudio said Prop M is not likely to affect smaller-scale landlords much. “The vacancy tax will impact corporate actors more than anything. If you’re a mom & pop, long term landlord, the reality is that you probably don’t have that many vacancies and if you do you don’t let it sit as long as the big players do,” she explained. “The corporate owners are the ones that have the most vacancies. They have the highest concentration of ownership of units. They have the financial cushions to be able to keep units vacant and still be able to maintain operations. A long-term landlord, they’re counting every month’s rent and so having a vacant unit isn’t in their best interests.”

“Corporate owners can afford to keep units vacant.”

Ben Coleman is a real estate broker at Hartford Properties who also own properties in San Francisco.

Coleman said he has to keep rents high when the first tenant moves into a rent-controlled unit because once they’ve established residency then he’s pretty much stuck with that rent.

“Property owners are subsidizing what the government hasn’t been able to do, and that is, to provide low-income housing or starter homes that would have made it realistic for builders to build affordable homes and sell those,” he said. “Nobody wants to do it, there’s no money in it. They’re not building enough starter homes because there is more money in luxury homes.”

Charlie Sciammas is the policy director for the Council of Community Housing Organizations. “In a city like San Francisco, we’ve seen so much increase in wealth inequality over the last generation. We have a lot of very high-income earners that are competing for housing units. So, landlords are able to cater their rents towards those high-income earners and are less inclined to offer rents that are also serving the rest of the workforce.

 “We saw a decline of 66,000 people, so our population is actually not very different from what it was in 2010, and yet the number of housing units that are available is much higher. We have 33,000 new housing units since 2010,” Sciammas said. “You would think that would have an impact on housing costs and yet it doesn’t. And so there’s clearly something happening with the housing market and I think Proposition M is part of the solution. It’s not the entire solution but it’s an important part of the conversation.”

Thomas K. Pendergast is a west side San Francisco reporter.

November 2022