The Impact Of Government Controls On San Francisco Office Space Development

san_francisco_downtownDowntown San Francisco’s office market is booming. Demand is extremely high, and developers are responding: more than 5 million square feet of commercial space is under construction or will be in the next 12 months. As the San Francisco Chronicle notes, that represents more new office space than the city produced in the previous 15 years combined.

But here’s the hitch: the city’s 1986 voter-approved “Proposition M” law caps the amount of new office space that can be approved each year at 875,000 square feet. And the current backlog of projects seeking approval is already well in excess of what can be built under this cap.

Who benefits from these government controls? Developers with approved projects and other commercial building owners:

[D]evelopers who have fully entitled projects ready to go are feeling extra confident that regulation will ensure that there won’t be a glut of space.

“Prop. M will start becoming a governor this year, so you don’t need to worry about oversupply,” [Kilroy Realty Corp. executive vice president Mike] Sanford said.

Meanwhile, San Francisco’s pace of new office building development is on par with other major urban areas with one exception: Houston. While San Francisco’s 5 million square feet of commercial space in development tracks Seattle’s 4.1 million square feet, New York’s 5.2 million square feet, and Dallas’s 5.2 million square feet, Houston is building an astounding 15 million square feet of new office space.

Now perhaps that’s related to a micro-economic boom unique to the Houston economy. I haven’t studied the Houston market to know.  But it could also be Houston’s hands-off approach to land use regulations.  While I personally don’t favor this completely de-regulated approach (Houston is a famously disorganized city due to the lack of zoning), it may indicate how much government controls in San Francisco and other cities are squelching development.  That low supply then drives up prices, benefiting incumbent businesses and hurting the economy overall.

And this is just on the commercial side. It’s even worse for housing, as any home-seeker or renter in the Bay Area and other urban markets could tell you.


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