SF residential projects languish as rising costs force developers to cash out
Just 3 miles separate 2675 Folsom St., a vacant former restaurant equipment warehouse in the Mission District, and 160 Folsom St., a former parking lot near the Transbay Transit Center where a condo tower is under construction.
But in the current economic landscape of the San Francisco’s housing development, the two properties are a world apart.
While the next crop of luxury condo towers like 160 Folsom, which developer Tishman Speyer has branded as Mira, continue to rise in the fast-growing eastern end of South of Market, other approved housing projects across the city, like 2675 Folsom St., are stalled and on the market because of soaring construction costs and fees, developers and other industry sources say.
The growing number of developers seeking to cash out rather than risk losing money on building is fueling concerns that residential production will start to decline even as the Bay Area’s housing crisis worsens.
Last month Axis Development put 2675 Folsom up for sale. The 117-unit project was approved in 2017 after a contentious political battle but has not yet started construction. Other entitled projects that are languishing before work has even started include the 304-unit One Oak St., the 299-unit development at 1270 Mission St., the 186 units at 1028 Market St., and the 220-unit 1601 Mission St. Some are seeking new financial partners and some an outright sale.
“Most entitled projects in the city are for sale right now — either publicly or privately,” said Bill Witte, president of developer Related California, which has 1,300 units under construction in the city. “We’re at that point in the cycle.”
There are 6,750 units under construction in the city, about 1,000 units more than a year ago. While that is well above the historic average, there are another 15,000 units that have been approved by planning officials but have not started construction. Projects containing 6,690 of those units have secured all the permits needed to start construction but have not broken ground, Planning Department documents show.
Developer Eric Tao of AGI, which has completed about 1,200 units in SoMa, the Mission and Dogpatch over the past decade, said construction cost increases of 10 to 15 percent annually over the past five years is mostly to blame for the delays. He said his company is re-evaluating aspects of 1270 Mission St.’s design, hoping to reduce costs enough to make it pencil out.
“We are trying to make it work — it’s close but not quite there,” Tao said. “When we got 1270 Mission approved, if everything else had been frozen in time, we would be building right now. But construction costs went up. Time is not your friend when you are a developer.”
Chris Foley, a real estate investor and partner in brokerage firm Polaris Pacific, said that in the current construction environment a condominium developer needs to sell units for at least $1,400 a square foot for a wood-frame building and $1,800 a square for a taller, steel-frame midrise or high-rise. Even in a city where more than 80 percent of the population is priced out of the market, those numbers are a stretch, Foley said.
“The demand for condos is there, but construction costs are killing the industry,” he said. “Above $1,400 a square foot is a tough sell unless it’s an unusually good location.”