Across the Bay Area, the pace of homebuilding is painfully slow. But San Jose officials are trying to look beyond dragged-out zoning and density debates to highlight another element keeping construction at a snail’s pace in their backyard: financing.
As federal and state funds for housing have largely dried up, San Jose has been forced to rethink its approach to affordable housing, shifting its focus away from 100% affordable developments — which officials believe are a difficult sell to developers who wouldn’t make as much money from them as they would from market-rate units — toward mixed-income projects.
To bring homes from mere plans to reality, the City Council unanimously approved a pilot program Tuesday to experiment with mixing and matching funding models for the city’s housing projects in new ways. The strategy includes using city loans to increase affordable units in high-density developments, securing tax-exempt bonds, and slashing fees for developers who agree to let the city lease their apartments to guarantee them steady income.
By guaranteeing rental income and reducing upfront construction costs, the city hopes to woo developers to break ground while lowering rents for low-to-moderate-income families.
The financing methods for a project will be approved on a case-by-case basis, and the city’s housing department will track the results and report back to the council in March before any long-term policy changes are finalized.
Consistently ranked among the most unaffordable cities in the country, San Jose is required to make room for at least 62,000 new homes by 2031, the second-highest target in the region behind San Francisco. While the city has already greenlit more than 31,000 units over the past decade, according to housing staff, nearly two-thirds of them — over 20,000 homes — determined to be financially unfeasible — remain stuck on paper.
The median home sale price in San Jose reached $1.42 million as of June, while the average rent for a two-bedroom property stood at $3,325, according to real estate website Zillow.
Housing officials noted that the rental vacancy rate sits at just 3%, highlighting the urgent need to build as much — and as fast — as possible. But with sky-high construction costs and interest rates, developers say they simply can’t afford to break ground.
That reality is reflected in the actual number of homes built. Over the past three years, San Jose constructed fewer than 4,500 total units — averaging around 1,500 homes a year, with affordable housing making up roughly 40% of the total, according to a housing department presentation Tuesday. A little more than 3,000 units are currently under construction.
“We have said yes, typically unanimously, to virtually every housing proposal that has come before the council,” Mayor Matt Mahan said at the council meeting. “The challenge we face today is less about zoning, height limits — it’s more about the cost of construction.”
Last month, contention over a major overhaul of the city’s zoning laws — to be finalized next year — pitted housing advocates against residents who worry that proposals to quadruple density in single-family zones could degrade the quality of life in their neighborhoods.
But even when the city does approve zoning changes, without incentives to build, those projects may remain stuck on paper, officials said.
“We need to bring in capital, public and private capital,” Deputy Housing Director Banu San told council. “Public dollars alone are not enough to build housing, and we really need to strategically use public resources to create innovative ways of financing development overall.”
While support for the financing models was unanimous, some leaders and community members raised concerns over limited public funds being used to finance market- or moderate-income housing, instead of directing those resources toward residents in the lowest income brackets.
“Both gap financing and master leasing rely on limited city funding, so maintaining the right balance as these programs are implemented will be important,” Councilmember Peter Ortiz said. “And I don’t deny that building more housing in the long run may make housing more affordable, but our residents need intervention now, so we can’t lose sight of that overall goal.”
Councilmember Pamela Campos pointed out the city’s skewed Area Median Income — a federal formula factored into affordable housing eligibility — where a large segment of the population works in high-paying tech jobs.
“The Area Median Income for a family of four is over $200,000, which means an extremely low-income family of four makes $62,000 a year. These are working people who clean our buildings and homes, watch our kids, and prepare our food,” she said. “An affordable housing strategy that does not include extremely low-income housing risks leaving behind tens of thousands of hardworking people who need housing in our city.”
Housing Director Erik Soliván pointed out that outdated tax credits for fully affordable housing are unsustainable, forcing rents up 5% to 8% a year just to keep buildings viable for property owners and the city, even if residents’ incomes do not grow at that rate.
While the city is looking for solutions to maintain funding for its existing affordable building projects, Soliván said he believes the path forward is to combine income levels in one building in order to make housing projects financially sustainable long term.
“That’s where we see challenges, but also some opportunities for devising some strategies to keep those buildings preserved, while also looking at new production that’s stabilized by some higher-income units in the building,” he said.
Mahan acknowledged concerns about neglecting housing for the city’s lowest-income residents, but remained confident that mixing income levels in projects is the right path forward.
“I do think the data should guide us,” Mahan said, asking staff to bring back findings next year. He argued that projects must have a sustainable mix of different incomes to survive without requiring constant public bailouts or risking buildings having to shut down altogether, adding that “it’s a real challenge to balance this.”