☆ Housing expert: SJ Housing Director opening opportunity to fix past strategic blunders

San Jose’s Director of Housing will retire this July, with the City still in crisis mode regarding affordability and homelessness. According to Scott Beyer, head of the Market Urbanism Report, the City should look for a replacement with a dramatically different approach—one that rejects a hyper-regulated land-use and rental management regime, and embraces instead a deregulatory approach. Simply put: How about working with—not against—the market? An Opp Now exclusive.

San Jose’s Housing Department works with its $16.5 million operating budget to primarily fund affordable housing. Since its 1987 founding, it has built thousands of affordable units. It also gives money to nonprofits for social services, homeless response programs, community infrastructure, neighborhood revitalization, meals for low-income seniors, and more. The department oversees tenant protection programs like rent control and the city’s Ellis Act Ordinance. During the outgoing administration, it strengthened these tenants’ rights, also advancing a “Just Cause” ordinance requiring landlords to give reasons for evicting a tenant.

Despite all this, a local media outlet notes that “the housing situation in San Jose has gotten worse.” The number of homeless increased from 4,063 in 2015 to 6,739 in 2022. San Jose is among the most expensive places in the country to rent or buy a home. The department still lags on its main mission: to build affordable housing. San Jose had a goal from 2014 to 2022 to build 20,849 affordable units, but only built 5,057 over that time.

This is not all the department’s fault, as it speaks to San Jose’s larger economic and regulatory issues. But the outgoing director has misidentified how to address them.

“There are not enough funding sources to meet the demand and need for affordable housing,” said Jacky Morales-Ferrand in an April interview. “We need more money from the state and more help from the federal government. The goals are just not attainable without more funding.”

But San Jose does not really need more funding. It needs new ideas.

The best thing an incoming director can do is be forthright on how lack of open markets—not lack of funding—hinders San Jose.

Despite all the demand, San Jose can barely build much new housing. Until recently, 94% of the city was zoned for single-family residential. State Bill 9 made slightly higher densities legal by-right through much of the city, but a study by UC Berkeley’s Terner Center found that the law has spurred almost no new housing in San Jose (or other California cities for that matter). The city needs model legislation that goes further than SB 9, making much higher densities legal by-right. Such upzoning would create the financial incentive developers need to actually redevelop their properties. It would allow more multifamily units, which are more affordable than single family homes and cheaper to build since construction costs are split among more people.

The city should also let property owners do what they want with their own property. The Housing Department enforces the Ellis Act Ordinance, which was passed in San Jose in 2017. The Ellis Act is a state law allowing landowners to evict tenants if they want to sell or demolish their property. The San Jose add-on ordinance gives tenants additional protections. They get up to a year’s notice of eviction and receive relocation assistance from the landlord. If the building goes back on the rental market within 10 years, the tenants get a right to return. Newly-built units are also subject to rent control if the original units were under it. The ordinance collectively discourages renovation of old buildings, construction of new ones, and general provision of rental units—by making all three more expensive.

San Jose burdens developers with government service and impact fees. Fees should be used to cover the city staff’s time to review and approve plans, but instead, they are used to fund outside programs. One developer was charged a park fee of $48,000 just to build two studio apartments. To its credit, San Jose has made some movement to reduce such fees.

Another thing San Jose’s new housing director could do is work with home construction and provision innovators. This is especially apt given the innovation happening in Silicon Valley.

Veev, a startup based in Hayward, creates mass-produced homes. Their prefabricated homes are built much faster and at a lower cost than traditional construction. Flow, a company founded by Adam Neumann (formerly of WeWork) and backed by local VCs, uses tech solutions to manage affordable community-driven home projects.

Such startups are most useful in providing housing to lower-income people, and San Jose, to its credit, is moving in that direction. San Jose used to pursue a “Housing First” policy, with permanent supportive units costing $800,000 and taking five or six years to build. Then the city pivoted to “quick-build units”—tiny homes for the homeless that cost less than $100,000 and take only a few months.

A third way to get cheaper housing is to convert office buildings into housing. San Jose’s office vacancy rate is 12%. Some building owners want to turn their buildings into housing, but worry about the cost of conversion and getting their plans approved by local planners. A proposed state law, the “Office to Housing Conversion Act,” seeks to streamline the approval process and give funds to subsidize conversion costs.

San Jose could do that on a local level. Calgary, Alberta created a program to fund conversions of old office buildings into housing. So far, it has approved five projects.

The final thing the new director can do is clean up the relationship with local housing nonprofits.

The Housing Department’s main role is to work as a funder for affordable housing and give grants to nonprofits. Last year, the department, flush with federal COVID relief aid, doled out $89 million in grants. Nonprofits have a long history of cozying up to politicians in order to gain funding.

Former mayor Sam Liccardo complained in an email, “we don’t seem to have good performance/outcome metrics to hold our nonprofit providers accountable... I don’t doubt that there are nonprofits that are underperforming.” In his view, nonprofits simply expect funding based on their preexisting relationships with city officials.

Some people suggest that nonprofits should have to register as lobbyists. San Jose Spotlight reports that current Mayor Matt Mahan met with Jennifer Loving, CEO of the nonprofit Destination: Home three times in two months. The nonprofit receives more than $13 million from the city. Lobbyists in San Jose have to file reports when they meet with elected officials. Requiring nonprofits to register as lobbyists wouldn’t stop them from operating normally, but would increase transparency.

San Jose’ Housing Department recently pushed the COPA bill. It would’ve required sellers to first offer their property for sale to a nonprofit before putting it on the market. COPA was pitched as a way to preserve affordable housing, but would likely slow housing production (see our recent critique of COPA here). The bill, which was voted down in committee, would have strengthened ties between nonprofits and the city; and the fact that it was even considered shows how much power the industry has.

While housing nonprofits should perhaps play some role in making San Jose more affordable, the larger issue is the city’s anti-market policies. Regulations that restrict land, burden property owners, and extort fees have created a home shortage that no level of “funding” or “tenant protections” will reverse. Hopefully, San Jose hires a new director who understands this philosophically and then works to change things.

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Image by Patrick Lauke