Magazine March 9, 2020, Issue

Why Homes in the Bay Area Are Unaffordable

(Arnd Wiegmann/Reuters)
Instead of new development, we got the Google piñata

Maybe it was the $2,070 bottle of wine. Or the junket to a hot spring in China. Or perhaps it was the John Deere tractor gifted for a vacation home in Colusa County. Or blabbing to his girlfriend about how he had granted a Chinese developer a shortcut through the maze of San Francisco’s permit process for new housing. Whatever the racket, by January 28 the FBI had seen enough, and its agents arrested San Francisco’s public-works director, Mohammed Nuru, on charges of fraud.  

At a post-arrest news conference, the U.S. attorney for the Northern District of California quoted the complaint as alleging “corruption pouring into San Francisco from around the world.” Though he isn’t named in the complaint, Zhang Li, a billionaire hotel magnate from China, is alleged to have bribed Nuru to speed up the approval process on a condo project. Li had spent five years developing a property located at 555 Fulton Street while also trying to get permission to have a grocery store in the building. The plot thickened three weeks after Nuru’s arrest when London Breed, the mayor of San Francisco, revealed that she had dated Nuru 20 years ago and had recently received a small gift from him. Now the U.S. attorney may rightly decry the corruption inherent in giving gifts for favors, but we can hardly be surprised that an approval process that takes years set the stage for it. The bigger question is how the stakes for building anything new ever got so high. 

San Francisco has virtually banned new housing. It forbids apartments of all shapes and sizes, limits the number of units per property, caps the number of small “shoebox” units to a few hundred, and has outlawed building anything higher than 40 feet in 80 percent of the city. What few skyscrapers there are cluster near the base of the Bay Bridge. There is no end to the stupidity and triviality of calls to preserve the character of a neighborhood and enrich its current inhabitants by limiting the construction of new apartments and houses. Unsurprisingly, because of this constrained supply and stoked demand, the median price for a one-bedroom rental is the highest in the nation, at $3,700 per month. To buy a single-family home, a starter home with flaking and rotting surfaces, a family needs $1.5 million on average and had better be paying cash. The cost to construct a single new apartment unit is over $700,000, nearly triple what it was a decade ago. 

Rather than address the problem, however, the mayor, board of supervisors, planning commission, and land-use commission, together with a myriad of cracked, has-been community groups, have built for developers an obstacle course that even the most energetic minds cannot navigate. The permit process is fraught with trapdoors every step of the way in the highest-stakes game of Chutes and Ladders known to man. A shudder, a sense of fated financial ruin, passes across the face of any developer called to yet another hearing before the planning commission. Just about anyone anywhere has the standing to protest and cause delays. One constituent worries about a cast shadow or the preservation of a historic coin-operated laundromat and—crack!—the door opens and you fall back down all the way to square one. Meanwhile, you have lost years and spent millions. As Matt Haney, a member of the city’s board of supervisors, recently admitted in a tweet, the city’s process is bewildering “almost by design.” The result, he says, “is that the insiders get through, if slowly, and everyone else waits. It’s fundamentally broken and can breed corruption.”

Here are a few by-no-means-extraordinary recent examples: It took one man 41 years—he started the process in 1978—and more than $2 million to get approval from the planning commission to build five duplexes in Bernal Heights. In another case, the owner of a nude bathhouse invoked the California Environmental Quality Act, a 1970 law that allows anyone to bring any development to a halt on environmental grounds. He argued that the construction of 1,500 new apartments would pose an environmental hazard to his naked spa patrons. It took a $100,000 side payment to quiet him down.  

Land-use restrictions have hollowed out the middle class and extinguished the city’s artistic ferment. The only poetry in North Beach can be found in a shabby museum about the Beat Generation that looks like a rotting convenience store in a bus station. More than 400 restaurants have closed in San Francisco in the last year, including, after 94 years, the famed Lucca Ravioli Co. in the Mission District and, after 47, Cafe Flore in the Castro neighborhood. Guitars, drums, and bass have fallen silent: You cannot have a garage band if the garage costs a million bucks. The Punch Line comedy club, where Robin Williams got his start, was on the precipice, saved only at the stroke of midnight by grants from the city and mercy from Google and Morgan Stanley. Nevertheless, the city’s cultural pulse is dead, and what remains is on life support. 

The city’s policies have also prevented social mobility by pushing lower-income residents to areas with less opportunity and saddling them with interminable commutes or lower-paying jobs way out in the sticks. About 5 percent of the Bay Area workforce commutes three hours or more each day. Marginalized groups have been shouldered out. San Francisco’s black community, which in 1970 accounted for 13 percent of the city’s population, has now shrunk to 5 percent.

It is the best of times, it is the worst of times by the Bay. At the end of the 1980s, the venture capitalist John Doerr summed up Silicon Valley’s decade by saying he had witnessed “the largest legal creation of wealth on the planet.” He soon apologized. How silly in retrospect, for the roar of the 2010s would make him look like a tame little kitten meowing for milk. During the last decade, Apple became the first company worth more than $1 trillion. Google later joined it. On the morning of May 18, 2012, Facebook sold its stock at $38 a share to the public in its IPO. Those shares are now worth over $200 apiece. 

If the Bay Area were its own country, it would rank among the 20 largest economies in the world, having produced $748 billion in goods and services last year. From 2010 to 2018, the Bay added 29,000 jobs per month, which is a little more than 3 million in total over the period. With all that wealth-creation, the state and city coffers have swelled with tax revenues. San Francisco’s budget has ballooned to $12 billion for next year. That’s almost double the $6.4 billion in 2010. California collected nearly $103 billion in income taxes last year, up $28 billion in five years, owing largely to the success of tech companies and other mainstay industries.

But that is not the only way the state and city rely on the tech industry. The state pension funds and the endowments of the University of California system finance all of the retirement payments for teachers, firefighters, professors, cops, and other public employees. All of them depend on large equity holdings in Apple, Facebook, and Google, among other companies, to meet their future unfunded obligations. Who invests in venture-capital funds? Who benefits from the next IPO? The teachers’ pension fund, CalPERS, and other such entities that help the middle class save for retirement and give the state a shot at paying its future promises. 

But instead of gratitude, we have the Google piñata. 

Progressives blame high-earning employees at Google, Facebook, Uber, and other tech companies for displacing the poor and driving up the cost of housing. The bitterness and resentment expressed in hatred for these employees, despite the taxes they pay, is really quite something. Here are some descriptions that have appeared in op-eds and essays over the years: “tech bros,” “Stanford douchebags with stock options,” “technological privilege,” “feudal overlords,” the equivalent of the Prussian Army invading Paris, “tech supremacists.” The writer-activist Rebecca Solnit speaks of “the siege of San Francisco.” 

But how could it be their fault? Down in Silicon Valley, Mountain View’s city council has shot down efforts by Google to build new housing for its employees, even on its own property. It is also very stingy with its zoning and will allow only 7,000 new units to be built by the end of the 2020s. The lack of housing led Google to start providing commuter buses for its employees, which I once heard referred to as “Google piñatas.” The idea was for progressive protesters to throw rocks at them, shake ’em up, hit ’em hard, and see what fell out. Over the last decade the plan worked. Protesters have destroyed many commuter-bus windows, made threats of violence against tech workers, and disrupted service. Worst of all, they accused the tech companies of that greatest of all evils, gentrification. 

By last fall, Google, Facebook, and Apple had had enough and decided to buy their way into the hearts of the locals. Together they have pledged $4.5 billion in aggregate to the region in investments in affordable housing and grants for nonprofits that help the displaced. As it turned out, the Google piñata had treats inside. 

What is unique about this situation is how the tech companies have utterly failed to transform the wealth generated in this boom into any political power at the local or regional level. Tech companies appear to influence national elections and foment revolutions abroad, yet they can do little to change the land-use ordinances around their home offices. So powerful are these giants that candidates for the presidency are calling for them to be broken up, but they are also prohibited from building so much as one new home for one employee in a leafy suburb. 

I reached out to Alain Bertaud, the renowned urban economist at New York University and author of Order without Design: How Markets Shape Cities. “When I read [that] Google says it’s going to give $1 billion to housing,” he told me, “I think it’s completely misplaced. Now, of course, we have to address homelessness in a non-market way, through social welfare, to help people out of their misery and bad luck. But what disturbs me is when I read some large percent of the housing should be affordable, which means below market-rate through subsidies. That only means waitlists and lotteries. As soon as the system doesn’t allow firefighters, cops, and schoolteachers to afford a house, you know that it is a broken system and no amount of subsidy will solve the problem.”

According to Bertaud, Google’s, Facebook’s, and Apple’s billions might be better spent lobbying city and suburban governments to relax their restrictions and free up the housing market. 

Good luck. The options for reform are meager. The California courts and the U.S. Supreme Court will not strike down unreasonably restrictive zoning laws or curb interminable permit processes on anti-competitive grounds. The libertarian lawyer and scholar Richard Epstein tried and failed to get the Supreme Court to hear a case involving a family that wished to build a house near San Diego. In effect, excessive regulations on building and glacial approval processes represent a public taking of private property, which, according to Epstein, the Fifth Amendment of the Constitution forbids “without just compensation.” His clients, Frank and Nina Bottini, complied with every zoning ordinance and followed every procedure, but after eight years and a fortune spent, the city still denied them their permit, and their lot remains vacant. The courts appear satisfied that these delays are “normal” and that governments should pay no penalty for the time wasted. The next option, Congress, has long had the power to set local zoning ordinances aside, but it has never once entered the fray of local land-use politics. Which leaves the last option: voting to change the rules in Sacramento and San Francisco. But this too has failed at every try. In the end, the insiders will always have the votes, and the outsiders can’t even think of moving to the city.

And so it is that San Francisco, now past the peak of its power and wealth, begins a new decade paradoxically richer than ever before yet also poorer than ever before. Bureaucratic gunk and sideshow cons have turned the city’s impressive endowments into disasters. It continues to commit itself to outcomes no one can understand, through a set of processes all know to be corrupt. Nevertheless, year after year city officials run on and reach their arms out, their goals always receding before them. No matter! Tomorrow the city will pass even more restrictions, stretch rent control even further, until one fine morning . . . 

The city seen from the Golden Gate Bridge is the city seen in the shimmering promise of all that the future might hold. Coming down the 101 from Sonoma, shooting out of the Robin Williams Tunnel, you see for an enchanted three seconds the most resplendent view on earth, of a city floating on the glittering water. Just think of the tens of millions, from all over the world, who yearn to be in that city! There it is, the Athens, the Florence, the Paris of the 21st century, the city of ambition, where the future will be made . . . or not, as is more likely now, thanks to restrictive zoning laws. 

The only world in which California doesn’t go bankrupt is a world in which the visions pitched in Silicon Valley continue to come to life. If the chokehold on housing continues and the Bay Area economy can’t grow as it did over the last decade, this idiocy could take the whole state of California down with it as municipalities default on their unfunded-pension obligations and the income taxes used to pay for basic public services evaporate—surely an episode that history will record as one of the most extraordinary economic squanderings of all time.

This article appears as “The Google Piñata” in the March 9, 2020, print edition of National Review.

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Michael Gibson is a co-founder of 1517 Fund and was previously the vice president for grants at the Thiel Foundation.

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