Growth Coming to the Hill, Like It or Not
According to a recent article in Atlantic Cities, the 94107 zip code — Potrero Hill — has the Bay Area’s largest concentration of venture capital investments. The Hill, from its lofty 308 feet perch, looks down on the world’s most thriving technology and financial center. It’s also close to San Francisco’s three CalTrain stations, which serve as wormholes to nine of the region’s other top 10 capitalized zip codes. With venture capital equaling growth, it’s not surprising that the Hill is feeling pressure to densify; in fact, it’s amazing that the neighborhood has survived this long in its current quasi-bucolic form.
I’ll soon be completing a doctorate in city planning at the University of California, Berkeley, and was asked to provide some insight — and possibly some data — on future growth options for San Francisco, and for Potrero Hill in particular. The question posed by the View was: could the City cost-effectively deploy transit investments to direct development outside the Southside neighborhoods? For example, what would happen if the City prioritized the proposed Geary bus rapid transit to the Richmond, as opposed to directing development towards the already congested corridors of Dogpatch and the Mission?
My first intuition — and the latest thinking in municipal planning — is that those corridors are congested because they’re in demand. I therefore assumed that Geary isn’t at capacity because it isn’t in demand. Economic models have shown repeatedly that people prefer neighborhoods with walkable amenities — like shops and restaurants — and to a lesser extent quick transit access to the rest of a city. In fact, in San Francisco the most useful method to determine where people choose to live is likely to be income sorting: well-off households live near other well-off families. And the rich price out those who can’t afford their preferred neighborhoods, which typically are those with good architectural aesthetics, views, and Downtown access.
The best way to visualize residential preference is to look at a map of sales price by square foot in San Francisco, shown on page 17. These prices are from 2011, which are already hopelessly outdated — zillow.com has Potrero Hill property values increasing 24 percent since then, while the City as a whole increased by 31 percent — but the patterns should still hold. High-priced neighborhoods include the Marina, Russian Hill, Nob Hill, parts of South of Market, and Mission Bay. Although city planners can shuffle growth around to a certain degree using zoning restrictions, the most important factor in growth is communication between consumers — house seekers — and producers; developers. In San Francisco, the willingness to pay exorbitant prices for even small condominiums in the right location is the signal that tells developers that they should build still more condos in those places.
To find out if my city planning intuition was correct — that the western neighborhoods aren’t in demand — I used data available through my research at UC Berkeley to test the feasibility of additional development throughout the City. I tested every parcel for its financial feasibility at its maximum allowable height at the current price shown in the map to the left, predicting a purchase price for any current development. I eliminated buildings constructed before 1930 from consideration, as many such edifices would be profitable to redevelop, but wouldn’t be allowed to because of historic preservation restrictions. The map of possible development is shown at the right in Possible Development.
This map seems to confirm my intuition: development isn’t financially feasible in most of western San Francisco. The most profitable development opportunities are in SoMa, Dogpatch, and, perhaps surprisingly, around Geary and Van Ness west to about Japantown. The general pattern is clear: high-income neighborhoods near downtown are expanding as much as they’re able to within zoning height limits.
The analysis to this point has taken zoning as a given. There are two ways a developer can profitably construct new buildings: they can construct more bulk than currently exists on the parcel, thus justifying a tear down of an existing building; or they can improve the quality of the existing edifice — either through renovation or demolition — and extract higher rents from new residents.
The first point is critical. If zoning doesn’t allow enough new building size relative to the current structure on a parcel, it won’t be profitable to increase the density of the existing buildings. I solicited input from a fellow PhD and real estate expert, Ian Carlton, who encouraged me to run this analysis without zoning constraints. And here’s the crux of the matter: in a ridiculously strong real estate market like San Francisco, prices indicate that development can be justified pretty much anywhere if height limits are loose enough. The prices along Geary certainly support large developments, despite the map previously described.
What does this mean exactly? In my and Carlton’s opinion, zoning height limits are controlling development in a strong market like San Francisco. Because of the large population in the Richmond and restrictive height regulations, growth is being pushed Southside, particularly towards land currently zoned for industrial use, which has few residents to resist. This phenomenon will create enormous growth in the near future around the Transbay terminal, SoMa, Mishpot, Dogpatch, and adjacent areas. If you’re opposed to growth around Potrero Hill, you’re losing the zoning battle to other more established San Francisco neighborhoods, which have a larger base of resistance.
It’s interesting to ponder what could, or should, happen once there are no more post-industrial lands in San Francisco to ‘colonize.’ Carlton took my results and related the growth outcomes to different types of transit, shown above. Per transit station, CalTrain has the highest growth potential, followed by Bay Area Rapid Transit, light rail, and bus. This fits with expectations, although it should be noted that CalTrain’s potential is likely higher due to more undeveloped land near CalTrain than around BART. In other words, transit still matters, fast transit matters more, and in a world not warped by zoning restrictions transit is the mechanism to shape growth.
Although this is only a rough sketch, there are some interesting conclusions that can be drawn. First, if zoning is taken as a given, most development occurs where there’s little development today. Second, if height limits were moderately increased throughout the City, it’s likely that demand would be sufficient to spark development in any location in San Francisco. If areas along Geary in the Richmond were upzoned — height limits increased — for instance, large amounts of development would occur there. This is true regardless of investments in transit on the corridor; automobiles still account for 49.8 percent of trips in San Francisco.
Third, if much larger swaths of the City were upzoned, or if zoning were removed entirely, it’s likely that public transit would become the lead determinant in the amount of development that could be supported. In this case, areas around BART extensions and Muni lines with exclusive right-of-ways would attract the most growth. Given that the market would have dictated that development occur near BART and Caltrain’s trunk transit lines, it wouldn’t be a bad idea to upzone those areas.
It’s likely that Potrero Hill will continue to be caught in the crossfire between incredible employment and wage growth, the new development that follows such growth, and its perfect location near Downtown and between the City’s main rail lines.
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