SAN FRANCISCO—In recent years, the tech industry has pledged billions of dollars to fund affordable housing developments in its back yard. These funds are championed by companies such as Google, Facebook, Salesforce and Microsoft as a way to remedy the housing crisis that is driven in part by these companies’ explosive growth and wealth creation.
But with remote work, local government approvals stymied by the pandemic, the effects of climate change reshaping the state and the threat of an eroding tax base due to economic downturn converging, it remains to be seen what the future holds for these funds. Marina Christodoulides, vice president of Project Management Advisors Inc., recently weighed in about whether or not those funds can help solve the complex problem of affordable housing. Allison Owens, vice president and general manager of Project Management Advisors Inc., has served as development fiduciary for these funds and shared insights from assessing and competing for the services of market-rate developers, to local zoning ordinances, innovative ways to bring down the price of development and the effect of pro- and anti-development activists.
GlobeSt.com: How has the tech industry attempted to solve the issue of affordable housing?
Christodoulides: We can’t paint the entire industry with a single brush. Some of the biggest, most well-known companies in the space have made attempts to address the housing crisis, particularly in the Bay Area where housing prices nearly doubled from 2012 to 2017. The issues around housing are socio-politically complex. No one factor created the crisis, so no singular company or effort will be able to solve it.
Each company is taking a slightly different approach, with different philosophies about what is needed to jumpstart a solution to create more affordable housing. Some are looking for breakthrough innovations that will upend the housing market or finding new, lower-cost methods to construct affordable housing. Across the board, they have started to fund developments through loans or grant programs.
These varied approaches are not unlike the differences we see in these companies’ day-to-day real estate decisions. Whether they opt to buy or lease office space, decide what amenities are important to them, and consider how they envision their teams using the facilities, are all varied depending on their corporate culture. That has carried through in their quest to meet the challenge of creating affordable housing.
GlobeSt.com: What are some of the main challenges of developing affordable housing that these funds or programs address?
Christodoulides: The issue of affordable housing is incredibly complex, which in some ways makes it perfect for these innovative companies to tackle, at least in part. One of the biggest challenges is the cost of affordable housing development. There is little about the process that is actually affordable. The cost of land, materials and labor doesn’t change just because a unit is affordable versus market rate. By some estimates, it costs as much as $750,000 to develop a single two-bedroom apartment in San Francisco, about three times the national average home cost.
Most of that expense is driven by land and labor costs, but there is also the challenge of finding appropriate funding and managing a complex capital stack. Tech companies are providing additional sources of funding to help spur these developments. They’re also supporting new development approaches that can streamline production and, through economies of scale, lower material and labor costs.
Zoning, land use and local/state regulations are also complex, and can slow the development process or stop it completely if not appropriately managed. There are multiple efforts to simplify the requirements for affordable housing and get more units online, but delays are not uncommon, and there’s little tech companies can do to address this established process and current regulations.
Finally, there is still a fair amount of opposition to higher-density housing throughout the Bay Area and the state. Addressing vocal opponents takes time and money, and it’s not a battle everyone wants to take on.
GlobeSt.com: What obstacles do tech companies face in executing these programs?
Owens: One of the biggest challenges for tech companies is they’re not real estate developers or operators. There is a significant learning curve to the development process, especially the affordable housing development process, and they may not have the time or inclination to address since real estate is ancillary to their core business.
That’s where real estate consultants come in to provide the expertise and experience as an investor’s representative. A big part of our role is performing due diligence on projects and flagging potential risks and helping assess whether specific projects are worthwhile to pursue.
One of the paradoxes of affordable housing development is it is highly competitive, with many market-rate developers and construction firms moving into the space, but tech companies want to know they’re working with the best and most experienced partners. A development fiduciary can help ensure the tech companies’ investments in affordable housing projects is worthwhile. We vet partners and keep the projects and programs organized, linking all the different development disciplines together cohesively.
GlobeSt.com: How has COVID-19 affected these programs? What new challenges does it create?
Christodoulides: Even though construction is deemed an essential business and affordable housing remains a priority, the realities of the pandemic have meant it’s not exactly business as usual.
Social distancing applies on worksites, which means smaller crews that can potentially slow down projects and increase costs. There are also additional cleaning and sanitation requirements that must be addressed on the development site.
For projects still in the planning phase, there has been a slowdown in approvals. Local departments are spread thin and navigating a new virtual reality. You can’t get the same face time as you would in the past to seek clarification or direction. It’s just all-around harder to get on the radar of local departments.
Another less-obvious obstacle of COVID-19 is the longer-term effect of an economic recession. There is a lot of concern about the erosion of the tax base and the associated affordable housing funding, from federal tax credits to local subsidies. At the same time, the need for this housing has never been greater. It’s taken what was already a high-pressure situation and added even more stress.
GlobeSt.com: What innovations have you seen in affordable housing? Are there viable options for delivering affordable housing units in the area?
Owens: Anything that reduces the cost and time associated with developing affordable housing is needed and welcome. It’s encouraging that tech companies are attempting to tackle this problem because we do need new thinking and approaches, and an all-of-the-above mentality to potential solutions. But we also need to prioritize real-world experience and knowledge of what actually works to gain approvals and move developments through to delivery.
Modular construction has been the buzz for the past decade, and while it can greatly reduce material and labor costs, it does require an advanced level of foresight and planning. You have to start manufacturing earlier in the development process, and there are limits to the types of units you can create. But we have seen more prefabricated, high-rise modular multifamily developments coming online and it’s a trend that will likely continue.
The use of lower-cost materials like cross-laminated timber is also gaining interest. Engineered wood represents a significant cost savings over steel and concrete structures, and has been designed to offer the same safety, like fireproofing, of those structures. These materials have been used throughout Europe and Australia for years but are only recently being adopted in North America.
We’ve seen a lot of innovation in how tech companies approach their office space, including using sustainable materials and design elements. It will be interesting to see if these elements may carry over to affordable housing and the developments they support.
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