Housing: Bay Area’s Achilles Heel

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The Bay Area is perhaps the West Coast’s most important region. And according to some, it is California’s economic engine, and one of the main reasons the state is in the black.

“Our economy is driving the economy of the state. The reason why the state has a budget surplus is because of the economy of the Bay Area,” said Matt Regan, senior vice president of public policy with the Bay Area Council. Regan, along with Essex Property Trust’s John Eudy and the Santa Clara Valley Transportation Authority’s (VTA) Deputy Director of Property Development and Management, Bijal Patel, spoke at a breakfast meeting in San Jose last week week organized by the law firm Hoge Fenton. The invitation-only event provided an update on BART’s expansion into San Jose and touched on transit-oriented developments, in general.

To illustrate just how significant the Bay Area’s contribution to the state economy is, Regan compared statistics of various metropolitan statistical areas throughout the state. In 2013 Personal Income tax returns from two Bay Area MSAs generated over $21 billion in personal income taxes for state coffers. This was done by a population of a little less than 7.5 million people. In contrast, Los Angeles County’s 10 million residents generated just $13 billion in the same period, according to Regan’s presentation. Overall, the Bay Area represented 38 percent of taxes collected in the state with roughly 19 percent of the population.

“We are doing very, very well. If we were performing at the same rate as the rest of the state of California we would still be in recession,” Regan concluded.

While Regan’s initial comments provided an energized perspective on the impact our region has on the state and national economy, they were immediately subdued by his observation that our inability to meet the demands of the employers in the region could bring a halt to our economic prosperity and importance.

Regan does not see the highest risk coming from external factors, such as the slowdown in the Chinese economy, but rather in the employers’ inability to attract the best and the brightest talent to the region. As an example, he referenced a recent visit from the University of California’s President, Janet Napolitano, who said the number one challenge for the university is the cost of housing, which results in the system’s inability to attract and keep the best professors, researchers and students in its ranks. And this issue reverberates throughout other sectors as well.

“When the property market crashed in 2008, we dropped off the cliff in terms of new housing starts. We still haven’t recovered from that crash. We’re still at less than 50 percent of new housing starts compared to 2008,” said Regan.

This is not surprising for anyone tracking the housing market in the Bay Area, which has been on a tear. Reports as well as anecdotes provide a rich sampling of just how dramatically the cost of living has risen over the period of just a few years. And housing located in proximity to transportation has been renting and selling at a premium.

Essex Property Trust has been one of the beneficiaries of this transition. “When we hit the crush in 2008, and we all saw the Great Recession, and we were wondering if we were going to become something worse or get better, we took a pause and reevaluated our investment criteria. One of the things that we decided on unilaterally was that if we came out of the recession and back into an active economic climate, we were going to concentrate our focus on [transit-oriented development,” said John Eudy.

The Palo Alto based multi-family developer has invested over $2 billion in the Bay Area in 18 different developments over the last few years that total over 5,600 units. Eight of these developments are planned for 2015 delivery.

Essex realized very early that demographics are going to work in its favor and focused its entire development portfolio in the Bay Area on building housing around transportation. The understanding was that convenience, proximity to amenities and access to public transportation and regional thoroughfares would be paramount to anything else. And the outcome proved their assumptions correct. The demand for this type of housing is outpacing other traditional suburban multi-family housing that is not focused on transportation.

“The number of walk-ins that we’re getting relative to a suburban location is close to double,” Eudy said.

This one example illustrates a strong and growing market demand for convenient housing choice, but the shortfall of our region’s production was best summarized in Regan’s assessment of the goals set by the state legislation, SB375. The legislation,  signed by Gov. Arnold Schwarzenegger in 2008, was termed by some as the anti-sprawl bill, which among other things set certain housing targets throughout the state (Plan Bay Area in our region).

These targets were based on assumptions rooted in a time that pre-dated the Great Recession and subsequent recovery. The bill helped set a regional housing target of approximately 660,000 units that needed to be built in the region by the year 2030. The Bay Area Council saw that need closer to one million units, and it unsuccessfully fought for 900,000 units.

“We argued that we needed 900,000, looking at job projection growth, but we lost that fight,” said Regan.

Almost three years into the plan, further issues evolved. The plan called for an approval of roughly 91,000 units, and only 71,497 have been approved to date, according to Regan’s presentation. Anyone following city council meetings across the region will not be surprised, since approving housing projects in the region’s 100 cities is a hard and laborious task. The shortfall of nearly 20,000 units can be felt across the entire region.

What amplifies the issue even more is the fact that Plan Bay Area assumed that these 91,000 units would accommodate approximately 155,000 jobs that would be created during the same period. What the plan failed to account for was the actuality of 456,000 jobs created during that time, exacerbating the shortage of housing even further. According to Regan’s arithmetic, the region is short nearly 200,000 housing units, a number that is now larger than the total units projected for development.

“In the 2007-2014 housing cycle, the RHNA (Regional Housing Needs Allocation) cycle, only one city out of the Bay Area’s 101 cities met its RHNA obligations, and that was Milpitas. They met 200 percent of their RHNA obligation, no one else came anywhere close to that,” added Regan. “At the local government level, there is an incredible lack of willingness or courage to build housing. It’s very unpopular.”

VTA’s Patel provided additional support for these challenges. Her agency is battling a funding shortage to finish the planned BART expansion into San Jose and Santa Clara. VTA is facing a $2.4 billion funding gap for the second phase of this expansion, and short of a celestial alignment of several variables and funding sources, BART will likely not be able to fulfill its plans to complete the two-phase extension by 2025.

“What we hear from a regional perspective in terms of our economic competitiveness and our quality-of-life as we recruit and retain talent are really the flipside of the same coin: transportation and housing—those are the two really big economic and quality-of-life challenges we face,” said Carl Guardino, president and CEO of Silicon Valley leadership group. He spoke at a recent event organized by The Registry in July where he provided a prelude to these same concerns.

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