I'm not sure it's quite right to say that building codes aren't a big part of the housing crunch. If an independent commission were to take a fresh look at the building codes without interference from any special interests with a singular goal of reducing the cost of building market-rate housing, I'd be willing to bet they'd find ways to reduce the cost of building by about half. Granted, land makes up a substantial part of the cost of new housing in San Francisco, but that would still be significant.
But you're absolutely right about landlords sitting on empty space rather than reduce rents. That will probably continue to be the case for at least another couple of years if not longer, given the ubiquity of long-term leases and financing in commercial real estate.
I'm sure there's some non-trivial cost savings from code reform, I'm just skeptical it's anything like 50% in most places. I tend to follow Stephen Smith from the Center for Building in North America on code reform, but last I checked he was mostly talking about single-stair and elevators (he has a whole spiel on elevators).
You're totally right on the land bit — in high productivity locations like SF, land can end up being like ~66% of the total cost, so any reforms to allow folks to "consume less land" (i.e. build more densely) helps a lot and I tend to see that as the immediate binding constraint on supply and therefore prices.
Amazing post! What a great, concise explanation the many interrelated factors that contribute to the quagmire we find ourselves in.
I really appreciate your explanation of the landlords dilemma in lowering the rent. People assume that commercial building managers are just greedy, and it’s unfortunately much more of a Catch-22 than they realize.
One small thing you left out: one of the reasons so many building owners have loans that don’t let them lower the rent is those are the obtainable loans. Banks rely on standard “product types” that match the typical single use zoning classifications, and they prefer to fund “simple” buildings that match, because there are secondary markets for that “simple” debt. Thus it’s harder to finance initial development of versatile mixed use buildings.
I agree that zoning is the original sin, but if we did reform zoning we’d still have a lot of work to do to fix financing before development patterns could improve en-masse.
Great point. That's one of those angles to this story that I'm aware of, but don't fully understand.
Do you know off the top of your head what kind of institutions are buying up those obligations in the secondary market? I know the U.S. has Fannie & Freddie set up for home loans, but I'd assume it's all private (in as much as that term applies to financial institutions) entities for commercial real estate, yes?
The fact that so many people left these urban areas during the pandemic, that people voted with their feet, indicates there was a problem. People do not want to pay high rent, they do not want to spend hours in traffic.
Zoning is, and always was, the problem. Big cities are fine, but the housing supply must be able to adapt to the demand, currently it is unable to. Japanese style “inclusive” zoning is one potential answer here: https://www.lianeon.org/p/let-a-thousand-skyscrapers-bloom
What I see happening now, however, is many companies calling employees back into offices under threat of termination. Why they are doing this is unclear. There are many benefits to remote work, a broader and cheaper talent pool, huge overhead savings on rent and workers comp insurance…etc.
I suspect that many corporate boards have investors on them who are exposed to real estate generally. It is in their own interest to call employees back, not in the interest of the employee or the business at hand.
As a long time remote worker and now a department head at a remote company, I think people are quick to recognize the individual benefits of remote and slow to recognize the team costs.
Training and onboarding is harder remote. Managing effective teams and coordinating large scale efforts is much harder. Programming all day from your home office is great, but if you’re a manager at a company of 250+ people, most of your day is meetings and coordinating people, and doing 5+ hours of zoom is brutal. Office dynamics are also much worse: people who interact with each other primarily in text tend to treat each other worse and understand each other less.
We’ve had hundreds of years to learn how to operate large enterprises in person and we’re still learning how to do it. I don’t think remote is going away, but we still have a ton to learn about how to operate large-scale endeavors fully remote, and for some companies they’ve rationally decided that they don’t know how to do it and can’t afford to spend more time figuring it out as they go, so they’re returning to what they know how to do.
Remote isn’t going away, more and more companies will go remote or hybrid over time because as you say those benefits are compelling. But I think right now the lack of institutional knowledge of how to do it well is what’s causing some reversion.
I think this is exactly right. For an established team with good rituals around this working via zoom, slack, etc, it's fine. But, as you say, the advantages to in person work and the way in which those advantages exist are not always obvious. Just doing a silly white boarding exercise remotely on Miro vs physically being in the same room together makes a huge difference.
Most of the remote teams I know meet in person for a week every quarter and lots of legacy businesses are somewhere in the middle with hybrid set ups, but I think we spend the next 10 years sorting out what the new normal really looks like.
San Francisco‘s decline is very fascinating from an infrastructure perspective, I wish we had gotten that renaissance of artist collectives!
I'm not sure it's quite right to say that building codes aren't a big part of the housing crunch. If an independent commission were to take a fresh look at the building codes without interference from any special interests with a singular goal of reducing the cost of building market-rate housing, I'd be willing to bet they'd find ways to reduce the cost of building by about half. Granted, land makes up a substantial part of the cost of new housing in San Francisco, but that would still be significant.
But you're absolutely right about landlords sitting on empty space rather than reduce rents. That will probably continue to be the case for at least another couple of years if not longer, given the ubiquity of long-term leases and financing in commercial real estate.
Hey Malcom, thanks for the read!
I'm sure there's some non-trivial cost savings from code reform, I'm just skeptical it's anything like 50% in most places. I tend to follow Stephen Smith from the Center for Building in North America on code reform, but last I checked he was mostly talking about single-stair and elevators (he has a whole spiel on elevators).
You're totally right on the land bit — in high productivity locations like SF, land can end up being like ~66% of the total cost, so any reforms to allow folks to "consume less land" (i.e. build more densely) helps a lot and I tend to see that as the immediate binding constraint on supply and therefore prices.
Amazing post! What a great, concise explanation the many interrelated factors that contribute to the quagmire we find ourselves in.
I really appreciate your explanation of the landlords dilemma in lowering the rent. People assume that commercial building managers are just greedy, and it’s unfortunately much more of a Catch-22 than they realize.
One small thing you left out: one of the reasons so many building owners have loans that don’t let them lower the rent is those are the obtainable loans. Banks rely on standard “product types” that match the typical single use zoning classifications, and they prefer to fund “simple” buildings that match, because there are secondary markets for that “simple” debt. Thus it’s harder to finance initial development of versatile mixed use buildings.
I agree that zoning is the original sin, but if we did reform zoning we’d still have a lot of work to do to fix financing before development patterns could improve en-masse.
Great point. That's one of those angles to this story that I'm aware of, but don't fully understand.
Do you know off the top of your head what kind of institutions are buying up those obligations in the secondary market? I know the U.S. has Fannie & Freddie set up for home loans, but I'd assume it's all private (in as much as that term applies to financial institutions) entities for commercial real estate, yes?
The fact that so many people left these urban areas during the pandemic, that people voted with their feet, indicates there was a problem. People do not want to pay high rent, they do not want to spend hours in traffic.
Zoning is, and always was, the problem. Big cities are fine, but the housing supply must be able to adapt to the demand, currently it is unable to. Japanese style “inclusive” zoning is one potential answer here: https://www.lianeon.org/p/let-a-thousand-skyscrapers-bloom
What I see happening now, however, is many companies calling employees back into offices under threat of termination. Why they are doing this is unclear. There are many benefits to remote work, a broader and cheaper talent pool, huge overhead savings on rent and workers comp insurance…etc.
I suspect that many corporate boards have investors on them who are exposed to real estate generally. It is in their own interest to call employees back, not in the interest of the employee or the business at hand.
As a long time remote worker and now a department head at a remote company, I think people are quick to recognize the individual benefits of remote and slow to recognize the team costs.
Training and onboarding is harder remote. Managing effective teams and coordinating large scale efforts is much harder. Programming all day from your home office is great, but if you’re a manager at a company of 250+ people, most of your day is meetings and coordinating people, and doing 5+ hours of zoom is brutal. Office dynamics are also much worse: people who interact with each other primarily in text tend to treat each other worse and understand each other less.
We’ve had hundreds of years to learn how to operate large enterprises in person and we’re still learning how to do it. I don’t think remote is going away, but we still have a ton to learn about how to operate large-scale endeavors fully remote, and for some companies they’ve rationally decided that they don’t know how to do it and can’t afford to spend more time figuring it out as they go, so they’re returning to what they know how to do.
Remote isn’t going away, more and more companies will go remote or hybrid over time because as you say those benefits are compelling. But I think right now the lack of institutional knowledge of how to do it well is what’s causing some reversion.
I think this is exactly right. For an established team with good rituals around this working via zoom, slack, etc, it's fine. But, as you say, the advantages to in person work and the way in which those advantages exist are not always obvious. Just doing a silly white boarding exercise remotely on Miro vs physically being in the same room together makes a huge difference.
Most of the remote teams I know meet in person for a week every quarter and lots of legacy businesses are somewhere in the middle with hybrid set ups, but I think we spend the next 10 years sorting out what the new normal really looks like.