REAL ESTATE DEVELOPMENT EVALUATION SAN FRANCISCO CITY
Escarleth Cucurachi Ortega UP 458 Housing and Real Estate Development Instructor: Dr. Noah J. Durst MURP | MSU
Introduction In addressing the recurrent challenge of financially nonviable and unaffordable real estate projects, this evaluation focuses on a strategically selected 3,600 sq. ft. vacant lot in San Francisco City. Located in the central-east region near South Beach, the parcel, priced at $3,000,000, beckons as an opportunity to counter the city’s prevailing imbalance. The proposed mixed-use development, tailored for young professionals from Latino and Black populations, addresses the demand for affordable housing. Nevertheless, despite the city’s zoning flexibility, challenges arise from ordinance limitations and historical zoning standards, impacting both the developer’s Return on Investment (ROI) and housing affordability for the targeted demographic. Various development scenarios were explored, highlighting conflicts between pursued returns and ordinance standards, with efforts to optimize apartment layouts for flexibility facing challenges in achieving affordability, reflecting the influence of current market prices. The subsequent analysis supports these assertions through the utilization of data sourced from the American Community Survey 2021 5-Year Estimates (ACS, 2021), the Social Explorer 2017-2021 5-Year Estimates (Social Explorer, 2021), and the academic literature on housing and real estate in the United States.
2
Housing Tenure: Renters and Owners
Owner occupied Renter occupied
Real Estate Development Evaluation The demographic profile of San Francisco City underscores a pronounced demand for affordable rental housing among young minority groups. Specifically, Graphic 1 (data acquired from the Graphic 1. Housing Tenure: Renters and Owners in San Francisco City. American Community Survey, 2021) vividly illustrates that a majority Homeownership Rate by Race and Ethnicity (61%) of San Francisco City’s populace actively participates in the rental market. This prevailing trend not only emphasizes a substantial reliance on renting but also suggests a proclivity for adaptability within a dynamic urban environment. Moreover, the Owner predominant cohorts among renters, highlighted in Graphics 2 and Renter 3 (data acquired from the American Community Survey, 2021), point to the significance of Black, Latino (over 70%), and under-35-year-old groups (almost 30%). This detailed demographic pattern strongly White (NonBlack Asian Latino/Hispanic Latino/Hispanic) implies potential socioeconomic factors actively influencing the Race or Ethnicity choices made in the realm of affordable housing. 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00
0.00
Graphic 2. Homeownership Rate by Race and Ethnicity in San Francisco City. Percentage of Households by Age of Head of Household: Disaggregated by Tenure 35
30
25
20
Owner Renter
15
10
5
0
15 to 24 years 25 to 34 years 35 to 44 years 45 to 54 years 55 to 64 years 65 to 74 years 75 to 84 years
85 years and over
Age of Head of Household
Graphic 3. Percentage of Households by Age of Head of Household: Disaggregated by Tenure in San Francisco City
3
In this regard, the lack of an affordable market in the site selection, with a high-income demographic and minimal minority presence, offers an opportunity for fostering housing diversity, coupled with prospects for mixed-use development due to the diverse age Figure 1. Households Income in Site Selection for Rent (San Francisco City). distribution. The community boasts a high-income demographic, with a staggering 70% earning $100,000 or more, as detailed in Figure 1 (data acquired from Social Explorer, 2021). Recognizing the critical importance of housing diversity (NHMC, 2021), this scenario might be an opportunity to address varied preferences budgets, and potentially offer mid-range and affordable options. Likewise, the presence of a burgeoning Asian population (up 45%) and Whites (almost 29%), depicted in Figure 2 (data from Social Explorer, 2021), may serve as a potential indicator of gentrification, possibly impacting affordable housing alternatives for minorities. On a contrasting note, the age distribution, predominantly dominated by the 18 to 35 age groups (over 50%), as evidenced in Figure 3 from Figure 2. Race and Ethnicity in Site Selection for Rent (San Francisco City). Social Explorer’s 2021 data, presents an opportune landscape for mixed-use buildouts, catering comprehensively to professionals, families, and the burgeoning young population.
Figure 3. Age in Site Selection for Rent (San Francisco City).
4
7 M X I (I W M K R 2YQFIV SJ ,SYWMRK 9RMXW 8SXEP 'SQQIVGMEP 9RMXW ,IMKLX MR 7XSVMIW 8SXEP 4EVOMRK 7TSXW 0ERHWGETMRK 6IXYVR SR -RZIWXQIRX 63- SJ 8SXEP -RZIWXQIRX 24: SJ 8SXEP -RZIWXQIRX 63- SJ )UYMX] -RZIWXQIRX 24: SJ )UYMX] -RZIWXQIRX >SRMRK 'SQTPMERGI 1MRMQYQ 4EVOMRK 1E\MQYQ *%6 1E\MQYQ 9RMXW 4IV %GVI 1MRMQYQ 0ERHWGETMRK 1E\MQYQ ,IMKLX
7GIREVMS
7GIREVMS
7GIREVMS
7GIREVMS
7GIREVMS
7GIREVMS
However, despite the city’s zoning flexibility, remaining ordinance limitations significantly affect development design, decreasing the Return on Investment (ROI). The city’s zoning rules, outlined in Figures 4 and 5, make it easier for various scenarios to comply with the standards (scenarios 1 to 4). The permissive zoning regulations enable developers to achieve significant financial 2SX 1IX 2SX QIX gains. As illustrated in Figure 4, the disparity in parking between Scenario 3 and 4 signifies a slight rise in ROI profit (from 5.75% 2SX QIX to 5.73%). Adjusting parking ratios offers a financially responsible Figure 4. Analysis of Real Estate Development Scenarios (San Francisco City). solution that enhances revenue performance without lengthy financial commitments. (Spivak, 2018). Nonetheless, restrictions in maximum Floor Area Ratio (FAR represents the ratio of a structure’s >SRMRK 6IUYMVIQIRXW total gross floor area on all stories to the gross area of the building 1MRMQYQ 4EVOMRK 7TSXW 4IV 9RMX 2S GEV TEVOMRK VIUYMVIH lot (Nelson, 2014)) and building height crucially impede achieving 1E\MQYQ %PPS[EFPI *%6 the target return of 8%, as depicted in Figure 4 where scenarios not adhering to these zoning requirements (5 and 6) enable attaining the 2S HIRWMX] PMQMX (IRWMX] MW VIKYPEXIH F] profit objective. These limitations strongly inhibit design aspects, XLI TIVQMXXIH LIMKLX ERH FYPO ERH 1E\MQYQ 9RMXW 4IV %GVI VIUYMVIH WIXFEGOW I\TSWYVI ERH STIR thereby affecting profit returns as higher density is significantly WTEGI SJ IEGL HIZIPSTQIRX PSX associated with an enhanced ROI. As seen in Figure 4, scenario 1MRMQYQ 0ERWGETMRK 6IUYMVIH 6, featuring seven stories, achieves the highest revenue at 9.58%, surpassing the objective. 1E\MQYQ %PPS[EFPI ,IMKLX MR 7XSVMIW
Figure 5. Zoning Requirements (San Francisco City).
5
$4,500 $4,000
Lease Price per Month
$3,500 $3,000 $2,500 $2,000 $1,500
Additionally, historical zoning standards have likely exponentially raised prices in this area, rendering even small apartments unaffordable for the studied population. Danielson (1976) and Peca (2009) highlight how historical exclusionary zoning has affected urban real estate markets, possibly resulting in a housing Figure 6. Comparison of Housing Unit Size and Lease Price per Month. shortage and subsequently increasing both demand and prices %JJSVHEFMPMX] 7GIREVMS =SYRK 4VSJIWWMSREPW *EQMPMIW in this context. For example, the smallest researched apartment 8]TI 8]TI 8]TI (360 sq. ft.) rents for nearly $2000 monthly, strongly exceeding the WXYHMS FH FH affordability threshold set by the National Low Income Housing 9RMX (IWMKR ERH 'SWX Coalition (2019) of up to $913 (see Figure 6). Furthermore, both 7M^I MR 7U *X development scenarios pose challenges in meeting the needs of 1SRXLP] ,SYWMRK 'SWX the target population, deeply affected by the comparable market %JJSVHEFMPMX] prices that are already unaffordable. In Scenario 1, difficulties are -RGSQI 8LVIWLSPH JSV 'SWX prominent, particularly for Type 2 (2bd) and Type 3 (3bd) units, with &YVHIR monthly costs of $2,387 and $3,183, posing significant hurdles even 'SWX &YVHIR EX O -RGSQI at higher incomes ($70k) (see Figure 7). This signifies a substantial 'SWX &YVHIR EX O -RGSQI 'SWX &YVHIR EX O -RGSQI obstacle, especially for Black or African American populations, Figure 7. Affordability Scenario 1: Young Professionals (Families). which is $44,142 (data from American Community Survey 2022 %JJSVHEFMPMX] 7GIREVMS =SYRK 4VSJIWWMSREPW 7LEVMRK ,SYWMRK 5-Year Estimates). In Scenario 2, despite overall improvements, 8]TI 8]TI 8]TI struggles persist, especially for Type 1 (Studio) and Type 3 (4bd) WXYHMS FH FH units, which have a cost burden of over 46% at a $30k income 9RMX (IWMKR ERH 'SWX (see Figure 8). While this scenario presents a more budget-friendly 7M^I MR 7U *X option, it does not cater to young professionals with families less 1SRXLP] ,SYWMRK 'SWX inclined to share an entire apartment. $1,000 $500
$0
0
200
400
600
800
1,000
1,200
1,400
Dwelling Unit Size in Square Feet
%JJSVHEFMPMX]
-RGSQI 8LVIWLSPH JSV 'SWX &YVHIR 'SWX &YVHIR EX O -RGSQI 'SWX &YVHIR EX O -RGSQI 'SWX &YVHIR EX O -RGSQI
Figure 8. Affordability Scenario 2: Young Professionals (Sharing Housing).
6
Conclusion In conclusion, the analysis reaffirms the critical incompatibility of higher profits and offers affordable options among young minority groups. While the chosen site presents an opportunity for fostering diversity in a market characterized by high-income demographics, substantial hurdles emerge due to zoning limitations. These constraints not only impede development design but also impact the project’s ROI. Moreover, the compounding effect of historical zoning standards exacerbates the unaffordability of even modest-sized apartments for the pursued people. To mitigate these challenges, incentivizing ROI through measures such as density bonuses is proposed. However, it is imperative to recognize that this addresses only part of the problem. A holistic solution necessitates confronting and revising zoning limitations. Additionally, cautiously exploring alternative locations with more affordable market comparables is recommended, as this approach, if not handled judiciously, may unintentionally perpetuate population segregation and maintain the prevailing housing imbalances in the city.
7
References American Community Survey 2021 5-Year Estimates (2021). U.S. Census Bureau. https://data.census.gov/cedsci/ Danielson, M. (1976). Zoning for Fewer People. New York: Columbia University Press. National Low Income Housing Coalition. (2019). Out of Reach. National Low Income Housing Coalition. National Multifamily Housing Council. (2021). The Housing Affordability Toolkit. NHMC. Retrieved from https://housingtoolkit. nmhc.org/wp-content/uploads/2019/04/NMHC_PDF-Sections_ Full-Doc.pdf Nelson, A. (2014). Foundations of Real Estate Development Financing : A Guide to Public-Private Partnerships. Washington, DC : Island Press. Peca, S. (2009). Real Estate Development and Investment. Hoboken, New Jersey: John Wiley&Sons, Inc. Social Explorer 2017-2021 5-Year Estimates (2021). Social Explorer. https://accounts.socialexplorer.com/ Spivak, J. (2018, October). American Planning Association. Retrieved from People Over Parking: https://www.planning.org/ planning/2018/oct/peopleoverparking/
8