McNellis: Hollowing out the Museum

By John McNellis

“A full-fledged housing crisis has gripped California…” New York Times 17 July 2017

Bay Area, San Francisco, McNellis Partners, John McNellis, Silicon Valley, Palo Alto
[dropcap]Y[/dropcap]es, our housing crisis is so critical those envious bastards at the Times are proclaiming it on their front page. So critical that a local politician here is more likely to come out against world peace than affordable housing. But she’s about as likely to vote for pro-housing laws as the USA is to unilaterally reduce its nuclear stockpile.

At the 30,000 foot level—it’s pretty in the clouds—a few politicians in Sacramento are trying to pass state-wide bills to force cities to allow more residential development. Not with champagne success.

It’s less pretty in the trenches, particularly if one focuses on Silicon Valley. Ground zero for the housing shortage, the city of Palo Alto is—not coincidentally—the reigning monarch of the Lucky Location club. Thanks to the happenstance of being Stanford University’s picture frame, the town has been the spawning grounds for almost every great tech company ever.

Density is like heaven: Everyone wants to go to heaven, but no one wants to die

Zillow says $200,400 is the median house price in America today. Zillow multiplies that number by 12.96 to come up with Palo Alto’s median price of $2,598,200. And even that whoa number is misleading. According to the brokerage firm of Alain Pinel, a lot in North Palo Alto—the cool part of town—goes for around $2.5 million all by itself, that is, $2.5 million before you build your dream house on it.

Is this news to anyone in Palo Alto? No. In the town’s most famous resignation letter (, Kate Downing quit the Planning Commission a year ago, saying she and her husband, both well-paid professionals, could simply not afford to live there. “After many years of trying to make it work in Palo Alto, my husband and I cannot see a way to stay in Palo Alto and raise a family here.” Ms. Downing pleaded with the city to make affordable housing its top priority. “If things keep going as they are…a once thriving city will turn into a hollowed out museum.”

To no one’s surprise, things have kept going just as they were since her departure. Zillow says housing prices are up 2.54 percent, and city permits have been issued for only 3 multi-family projects in the last twelve months, totaling 15 units. For a town of 67,000, 15 new units is a rounding error. Why focus on multi-family projects? Because if dirt costs $2.5 million a lot, new single family residences will never be affordable. Period. The town’s only hope is apartments and condominiums. And while a slim majority of the city council favors affordable housing, no property has been rezoned in the last year to grant it greater density, the only possible way housing might become more affordable. (Density is like heaven: Everyone wants to go to heaven, but no one wants to die; everyone loves the benefits of density—the cafes, the walkability and cultural opportunities—but no one wants to pay its price: occasional traffic, noise and congestion.)

Despite the city’s talk of encouraging housing, the street reality is different. I have a friend* who is building one of the three projects mentioned above. Because his land—a small, unused parking lot downtown—was already zoned residential and his project only two units, no public hearings or meetings of any kind were required. All he had to do was prepare conceptual drawings, get them approved by the planning department, then prepare construction drawings, have those approved by the building department and start construction. In a town that wants development, you can get this done in 6 months. In Houston, maybe half that time.

In Palo Alto, this approval process knee-walked for 18 months. The cost? The city charged a total of $210,481 in fees and exactions before it would issue the building permit. $210,481 for a pair of apartments. If this friend had paid that average $2.5 million for his property, his carrying cost for the extra year of processing would be $250,000, meaning his city costs alone for the duplex totaled $460,000. Put another way, before ever turning a shovel in the ground, before counting the land, architecture, engineering, banking and construction costs, his units were already $30,000 more expensive than a median-value house almost anywhere else in the country.

Did it have to be this way? No. The truth is that since Ms. Downing’s sad departure, the city has made housing less affordable than ever. Of the $210,000 in city fees, $120,000 of it was attributable to a newly enacted “Parkland Dedication” fee, an exaction that went into effect only two months ago.

Ms. Downing may prove another Cassandra. Go to any “Housing Affordability Index” you like, do the simple math and you will find that, with a standard down payment, a buyer’s annual salary must be about 20 percent of the purchase price for a house to be affordable, meaning you now have to make half a million a year to afford Palo Alto’s median-priced house. At that ticket price, the museum will hollow out, its visitors limited to the first 100 employees of the next Google to roll out of Stanford.

Few laws are as reliable as that of gravity. The law of supply and demand is one. Palo Alto—and far too many other cities in California—needs to both dramatically increase its allowable residential density and streamline its approval process. As long as local officials strangle housing starts, the mirage of affordability will be pushed ever further toward the distant horizon.

*OK, I’m not going to lie to you—it’s me.

John E. McNellis is a Principal at McNellis Partners in Palo Alto, Calif.

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mcnellis-book-coverTo read more from McNellis, please consider his book Making It in Real Estate: Starting Out as a Developer.

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