S.F. prioritized building homes for the ‘missing middle.’ 80% of units sit empty

For years, San Francisco politicians and housing advocates have fought for the creation of “missing middle” housing for workers with incomes high enough to be middle class in most markets, but who are often priced out of the famously expensive city.

But developers who have recently built apartments aimed at moderate-income families in San Francisco have discovered a harsh reality: The missing middle seems to have gone missing.

Of 216 recently completed units targeting households earning between 100% and 150% of area median income, known as AMI — a range of about $130,000 to $195,000 for a three-person household — 182 are sitting vacant. Just 15% of those units have found takers, according to data from the Mayor’s Office of Housing and Community Development.

“They have ended up creating such an onerous process to qualify that the process itself disqualifies those most in need,” said Cyrus Sanandaji, a developer with Presidio Bay who, a year ago, opened Ventana Residences, a 193-unit apartment complex at 99 Ocean Ave. in the Excelsior.

Ventana, along with the George, a 302-unit complex at Fifth and Mission streets, and the Canyon, a 283-apartment tower near Oracle Park, is one of a trio of recent buildings struggling to fill moderate-income apartments meant to target essential workers — such as teachers, nurses and firefighters — who are often held up as examples of the missing middle.

Ventana’s market-rate units are meeting expectations with about 70% of them leased. So are the deeply affordable units focused on families making 55% of area median income, or AMI, or about $72,000 for a family of three. Those have all been leased. But of the 14 units intended for households at the 110% level, only two have found takers. Those units start at $2,600 for a studio and go up to $3,600 for a three-bedroom.

At first, the BMR leasing seemed to be going well: more than 1,000 would-be tenants applied for the 91 apartments. But, two years later, the building’s 211 market-rate apartments are 93% leased while just 26% of the BMRs have tenants, although some of them are temporarily accommodating tenants who were displaced by a 2022 flood at 33 Tehama Street.

Despite the low demand, more BMR units are on the way. Of the 82,000 new housing units the state is mandating that San Francisco plan for in the next eight years, about 14,000 of those are meant to be affordable to moderate income families earning between 80% and 120% of area median income — currently between $124,000 and $172,000 for a four-person household.  

The Mayor’s Office of Housing and Community Development is working to reduce the paperwork that applicants are required to submit for BMR apartments, according to spokesperson Anne Stanley. The agency is also adding staff to help developers move more quickly through lottery lists.

The city says there is an obvious solution for developers having trouble leasing BMRs: Charge lower rents. Stanley said builders with moderate income BMRs “are well aware that rent reductions and concessions are a key strategy to leasing their units in this market.”

Under the city’s housing programs, even the higher-income BMR apartments have to be at least 20% less than similar market-rate units. At Ventana, Presidio Bay has cut rents by another 10% and is offering several months of free rent, but there is only so far it can go, Sanandaji said. Unlike nonprofit-built housing, which is subsidized by the government, private market-rate projects are underwritten with assumptions about how much revenue BMR units will generate. And higher-income BMR units help subsidize units that are more deeply affordable.

“We are only able to offer 55% AMI units because we have 110% AMI units,” Sanandaji said. “Without the higher AMI units, we cannot subsidize lower AMI units.” 

Rents in San Francisco are 26% below the pre-pandemic high, but some neighborhoods have recovered better than others. San Francisco Apartment Association Executive Director Janan New said the location of some of the buildings with high BMR vacancies — Mission Bay, Mid-Market and Excelsior — is likely a factor. “Those neighborhoods have not come back yet,” she said. “If those buildings were in the Marina, they would all be rented out.”

The misalignment between expectations and reality has been especially pronounced at the Canyon, part of the first phase of development at Mission Rock, which the San Francisco Giants and Tishman Speyer are building across from Oracle Park. 

Ten months later, the market-rate portion of the project is 70% leased, with 126 of 181 units rented. Meanwhile, the BMR units are 27% leased, with leases signed in 28 of 102.

In April, the San Francisco Port Commission voted unanimously to tweak the affordable housing plan for the next phase of Mission Rock.

For that building, which is under construction, the commissioners eliminated all units at the 150% AMI level and reduced the number of 120% units from 55 to 24. It increased the number of units targeting 90% AMI from 13 to 35. Altogether the number of affordable units in the building will drop from 97 to 59 while the market-rate units will increase from 157 to 195. The decline in affordable units will be made up for in subsequent phases of the development, according to Dan Adams, director of the Mayor’s Office of Housing and Community Development.

Adams told commissioners the changes made sense given market dynamics.

Adams, who only recently took over as director of the mayor’s office of housing, said he is focused on “procedural improvements” that will remove bureaucratic hurdles and make it less painful to qualify and ink a lease.

“As you get closer to market rate, you need to make it easier for people to get into units because they have choices,” Adams said. “They could go to a Class B or C product — or they could go to Oakland.”

Port Commission member Ed Harrington questioned if  “this whole discussion of the need for that middle income group is an old-fashioned idea at this point.” Gail Gilman, a veteran Bay Area affordable housing developer and member of the port commission, suggested that the higher income the prospective tenant is, the less likely they are to put up with the city’s bureaucracy. 

“For all the rigmarole you have to go through to apply for BMR … if I were a renter there would be very little motivation for me to take advantage of that,” Gilman said.