Condo Conversions Create Jobs

Blogging over at Beyond Chron, Randy Shaw recently wrote an article about how allowing tenancies-in-common (TICs) to pay a large fee to the city and bypass the condo conversion lottery will kill jobs in San Francisco.

I don’t make a habit of refuting every ridiculous article written about TICs, but this one was so over the top that I feel compelled to bring some facts to the discussion.

In his article, Mr. Shaw posits that:

“… it [condo conversion] would be a huge job killer, eliminating desperately needed construction jobs and making financing for new condo projects even more difficult to obtain.”

While I’ve heard any number of fascinating stories over the years about what condo conversions do or do not do to the city and its housing stock, this is the first time I’ve ever heard that condo conversions kill jobs. The heart of his argument seems to be that any homes converted to condos would reduce the demand for new condos by a ratio of 1:1 (or more, perhaps?). In particular, Mr. Shaw seems to be concerned with the development of new condo projects in neighborhoods that he identifies as “emerging” like Visitacion Valley and The Bayview. He goes on to state that:

“Building condos creates living wage blue-collar jobs, and most of these new condos are slated to be built as economic engines for emerging neighborhoods like the Bayview and Visitacion Valley.” – Mr. Shaw

I have a few problems with this argument. While I’m shocked to see Mr. Shaw suddenly advocate for the creation of condo developments in San Francisco, particularly when he has a history of taking pride in defeating development opportunities, we’ll put that to the side for now. Once I picked my jaw up off the floor, though, here are some facts that we should take into consideration if we want to have a rational discussion about condo conversions and jobs.

TICs aren’t found in the neighborhoods he expresses concern about
I did a search of all listed TIC sales in the San Francisco MLS from March 1, 2009, to the present. There wasn’t a single sale of a TIC in District 10 in that entire period! In fact, I had to go all the way back to 2008 to find even one TIC sale in district 10 (a 2-unit building in the Excelsior). If I go back over ten years to look at all sales in District 10 since January 1, 2000, in District 10 (here’s a guide to the MLS districts), there have only been six TIC sales in all of the following neighborhoods: Silver Terrace, Bayview, Portola, Excelsior, Mission Terrace, Outer Mission, Crocker Amazon, Visitacion Valley, Little Hollywood, Bayview Heights, Candlestick Point, and Hunters Point.

So, at most, in the emerging neighborhoods that Mr. Shaw is deeply concerned about, six new condos will be created. At most. If they haven’t already been converted to condos.

Where are the TICs?
As  you can see from the map below (which contains the location of all TICs sold for almost the entire past three years), the overwhelming majority of TICs have been sold in central San Francisco. These are neighborhoods like The Castro, Noe Valley, Corona Heights, Duboce Park, Glen Park, Twin Peaks, Mission Dolores, The Haight, Cole Valley and Parnassus Heights. What do these neighborhoods all have in common? For the most part, neighborhoods where you find TICs are neighborhoods that have been almost entirely developed, where the opportunities for ground-up development are incredibly rare.

View TIC Sales in San Francisco in a full screen map

Neighborhoods Aren’t Interchangeable
Mr. Shaw also doesn’t appear to understand that home dwellers (renters and buyers) are rather picky about their San Francisco neighborhoods. Some folks want to live in The Mission or nowhere else. Some set their hearts on Noe Valley and won’t settle for anything less. While most people have a list of five to ten neighborhoods that they are interested in living in, I have seen very few people who view his emerging neighborhoods (Visitacion Valley, Bayview) as interchangeable with their preferred neighborhood. Put another way, I have yet to meet a buyer that says, “Well, if I can’t get what I want in Noe Valley I’ll take something in Visitacion Valley.” While both neighborhoods might have Valley in their name, the similarities pretty much stop there. Neighborhoods are not interchangeable, and the creation of housing stock in one neighborhood does not destroy demand in another neighborhood.

Take a look at the boom years for condo development in South Beach, Yerba Buena, and SOMA. If you take the entire quantity of condos built at The Palms, The Millennium, One Rincon, The Infinity, Blu, SOMA Grand, and The Beacon the total is 2,287 – about 10% more than the 2,000 potential condo conversions that have Mr. Shaw terrified (on a side note, I don’t know if 2,000 is an accurate number of potential condo conversions – anyone care to help?). Did the sale of 2,287 condos in the South Beach/SOMA/Yerba Buena area decimate the condo market in Noe Valley, North Beach, Telegraph Hill or any other part of San Francisco? No, they didn’t! Why? Because for many buyers, the neighborhoods weren’t interchangeable, and even if they were willing to consider neighborhoods with new developments, many objected to the style or the size of the building. Not to mention the fact that demand for housing has almost always out-stripped supply because of the challenges developers face in building homes in San Francisco.

“In contrast, converting a rental or a unit owned as a tenancy in common (TIC) to a condo creates no jobs.” – Mr. Shaw

Condo Conversions Create Jobs
I don’t feel like I’m going out on a limb when I say condo conversion will create jobs. For starters, every unit approved for condo conversion must undergo three inspections by the city – one general building inspection, one electrical, and one plumbing. Any deficiencies noted by the city during these inspections must be fixed as a condition of conversion to a condo (in fact, the violations must be fixed no matter what). All of the work must be done with permits by contractors that are licensed in the appropriate trade. Most of these contractors are smaller outfits – not the big construction companies bidding on large condo project developments. Could they use the work? Absolutely! Would the conversion of 2,000 dwellings to condos put these folks in the soup line? Absolutely not!

In addition to the jobs generated by physical inspections and corrective work, the condo conversion process requires the creation of legal documents (the covenants, conditions, and restrictions – or CC&Rs – along with the bylaws and articles of incorporation) and a survey of  the condominium building. Both the survey and legal documents would bring work to small businesses. While we can argue if creating more jobs for attorneys is a good idea or a bad idea, the reality is that condo conversion will help keep the doors open at small businesses across the city.

“After all, if you were a builder trying to get financing to build an approved project, why would a bank lend money to you when your units will be competing with thousands of newly converted units fresh on the market?” – Mr. Shaw

Condo Converted Homes Are Already Occupied
In contrast with building new developments like SOMA Grand or The Palms from scratch, the conversion of an existing dwelling into a condominium does not create a vacant property. TICs are already occupied – primarily by hard-working home-owners, but also by tenants. A homeowner is not going to sell simply because they converted their ownership from a TIC percentage of the whole building to a condominium. Does it make it easier for them to sell? Absolutely. Does that mean they will? Not necessarily. And guess what – even if they did sell, that would be good for the economy and jobs because it would mean that they would need another place to live.

If they do move, realistically they are going to be interested in “moving up” in their existing neighborhood (or a nearby one), but who knows, maybe they’ll want a condo in one of Mr. Shaw’s developing neighborhoods. In which case, the condo conversion helped create demand for more housing, not reduce it. The sale of a home also generates revenue from transfer taxes that go directly to the city. Not to mention the painters, landscapers, movers and other handy-folk that get business when a home is bought and sold.

“Think we would see many Ellis evictions if speculators knew that 3-6 unit buildings in San Francisco could never become condos? How about addressing this serious risk to long-term tenants instead of figuring out new ways for real estate speculators to get even richer?” – Mr. Shaw

Buildings with Two or More No-Fault Evictions Are Already Prohibited From Conversion (Including Ellis Acted Buildings)
Mr. Shaw published an article on May 11, 2006, in which he was delighted about “tough eviction protection legislation” that had just been passed by the Board of Supervisors and signed by Mayor Newsom. What was this tough eviction protection legislation? It was an ordinance that prohibited the conversion of a TIC to a condo if there was the eviction of an elderly or disabled tenant after May 1, 2005, for any reason unrelated to the tenant’s behavior. The law also prohibits condo conversion if tenants have been evicted from two or more units since May 1, 2005, for any reason unrelated to the tenants’ behavior. This eliminates any building that was vacated using the Ellis Act (or any other no-fault eviction method that removes tenants from two or more units) from eligibility for condo conversion. The law is also building specific, rather than owner specific – restrictions run with the property regardless of who owned the building at the time of the eviction. How quickly we forget…

“… does not change the fundamental issue: 3-6 unit building that were built as rental units, and typically stayed rental units for over eighty years are now off the rental housing market when rental units in San Francisco are more scarce than ever.” – Mr. Shaw

Condos Can Be Rented!
Mr. Shaw argues that the conversion of ownership from TIC to a condominium will eliminate hundreds of buildings from the rental stock. Which is, quite frankly, a blatant lie. As he immediately acknowledges in the next paragraphs of his article, condos can be rented. They are not subject to rent control, which is an entirely different concern.

I’ve been a tenant in San Francisco, and I’ve been a homeowner. The creation of condos from TICs might do a lot of things — like help the city balance its budget. But to suggest that it will somehow kill jobs is perhaps the most ludicrous thing I’ve ever read.

Comments

  1. Markus McMillin says

    Matt: Do you know about the Harmon rent control case before the US Supreme Court? It is possible rent control could be found unconstitutional. If that happens, do you think condo conversion in SF will change? I’m trying to figure out the justification for condo conversion outside of rent control. I’ve tried to figure it why it exists, and I haven’t been able to figure it out? Do you know? Preventing condo conversion only hurts owners b/c they can’t get loans at the same rates as “normal” single family homes. The system as is helps the banks and that’s it. And the City too, I guess, for the money we waste each year paying into the condo conversion lottery. Let me know if you get a chance. Thanks. -Markus

  2. Matt Fuller, GRI says

    Markus,

    I’m not familiar at all with the Harmon case, I’ll have to look it up and do a bit of research on it.

    Every municipality in California can make their own rules about condo conversions, and San Francisco is a bit of an odd-ball because while we make it extremely difficult to convert your unit building to condos, once you actually have permission to do it, our requirements in terms of work (bringing things up to current code) are among the least restrictive.

    If rent control was to be found unconstitutional and San Francisco’s rent control and eviction control laws were suddenly tossed out the window, the political landscape of SF would change in ways that I’m hard pressed to coherently imagine at almost 10:00pm after a long day of open houses and buyer tours.

    But I’m going to put on my thinking cap and (hopefully) come back with some coherent thoughts on it all… Thanks for your comment!

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