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It doesn\u2019t take skyscrapers to solve San Francisco\u2019s housing crisis: Four- to six-story apartment buildings, like these in Mission Bay, could be a big part of the answer. | Source: Sean Fan\/The Standard<\/p>\nPatrick Kennedy\u2019s job is to build apartment buildings. Not the ones that loom in the skyline or outrage neighbors, but those that blend in with existing buildings \u2014 four or five stories, with 10 to 15 units. The ones that families move into, or that students can afford to rent, or that empty-nesters downsize to. The owner of Panoramic Interests has built dozens of these buildings in Berkeley and San Francisco over the years. Kennedy has several projects underway. But it\u2019s harder than it has ever been to make a project pencil out.\u00a0<\/p>\n
\u201cIt is a brutal time right now,\u201d Kennedy says. \u201cA lot of things are making it very tough. Construction costs are very high, higher than any place in the U.S. and maybe higher than anywhere in the world. It costs $1 million to build a generic two-bedroom apartment.\u201d\u00a0<\/p>\n
Everyone knows San Francisco is in a housing crisis, with rents soaring and homes selling for millions over the asking price. And most everyone agrees the city, and the greater Bay Area, needs more places to live, especially housing that is affordable for all.<\/p>\n
But in order to get more homes built, the numbers need to work. Before contractors can break ground, the cost of construction, land, and capital has to add up and pay off. Developers \u2014 and their banks and investors \u2014 need to know they will get a return on their investment of time and money. In the lingua franca of the housing industry, the first question is always: \u201cDoes it pencil out?\u201d\u00a0<\/p>\n
And the answer at the moment is largely no. It does not pencil out.<\/p>\n
It\u2019s not just developers saying the numbers don\u2019t add up. Ted Egan, the city\u2019s chief economist, came up with the same conclusion. \u201cWe\u2019re in an unusually strange place,\u201d Egan says, where the numbers just don\u2019t line up to give developers much, if any, incentive to build. \u201cThe market has given up on housing construction in San Francisco until the economics change.\u201d<\/p>\n
It doesn\u2019t take skyscrapers to solve San Francisco\u2019s housing crisis: Four- to six-story apartment buildings, like these in Mission Bay, could be a big part of the answer. | Source: Sean Fan\/The Standard<\/p>\n
That skepticism may be a surprise, given the record high rents and sale prices for homes. Surely it\u2019s a great time to sell a condo or rent out an apartment! But when it comes to building housing, potential income is only half of the equation. At today\u2019s prices, the costs of construction are just too high.\u00a0<\/p>\n
Rather than wait for a miracle \u2014 for interest rates to roll back to those of 2021, or for the price of lumber to return to 2019 levels \u2014 some are trying to change the equation.\u00a0<\/p>\n
The answer probably isn\u2019t to bank on 25-story high-rises sitting atop Safeways, or to expect Candlestick Park to turn into another Mission Bay. Instead of thinking big, it\u2019s time to think small. It\u2019s more likely that a bunch of little tweaks and innovations could get dozens of developers back in action across the city \u2014 starting with the humble 25-by-100-foot residential lots so common across San Francisco.\u00a0<\/p>\n
\u201cTwo-thirds of the city has these narrow lots that are ideal for infill, the kind of human-scale rowhouses and small apartment buildings that define San Francisco\u2019s most desirable neighborhoods,\u201d says Peter Hirshberg, executive director of City Science Lab San Francisco, a civic innovation nonprofit. A few tweaks to housing rules here and there, Hirshberg believes, could change the underlying economics and create a brighter housing future.<\/p>\n
Making the math work for infill development would create what\u2019s called missing-middle housing: buildings with two to 20\u00a0units that fit comfortably into lower-density neighborhoods.<\/p>\n
City Science Lab San Francisco estimates that such infill housing could yield 25,000 or more units in the next few years \u2014 and that\u2019s a conservative estimate. While that number alone wouldn\u2019t solve the crisis, it would reflect a tremendous increase in housing construction, an upsurge that could revitalize neighborhoods and the city\u2019s economy. And it would be about 10 times the 2,700 units built in San Francisco last year.<\/p>\n
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San Francisco\u2019s Victorians, many with two to four units, were mass produced from cookie-cutter plans that made building relatively fast, cheap, and easy. | Source: Tayfun Coskun\/Getty ImagesEven free land won\u2019t help<\/p>\n
As San Francisco\u2019s chief economist, Egan has the task, every three years, of pulling together a report gauging how realistic the city\u2019s inclusionary housing requirements are.<\/p>\n
Inclusionary housing requirements force developers to dedicate some portion of each project to affordable housing. (This is defined as a household spending no more than 30% of income on rent or a mortgage, and is typically tied to income levels at 80% or below the area median.) The requirements are popular in progressive circles; they\u2019re meant to ensure that more citizens \u2014 teachers, nurses, bus drivers, college students \u2014 can afford to live in the city. In 2016, voters approved Proposition C, which roughly mandated that 25% of units in large housing developments be affordable.<\/p>\n
So late last year, Egan began preparing a new report. His office brought on Century Urban, a local real estate financing consultant, to run the numbers. The objective was to see whether, given market conditions and affordable housing mandates, developers had any economic incentive to build housing.<\/p>\n
The team looked at various types of housing projects, from a 45-foot-tall building with 13 units to a 245-foot-tall high-rise with 341 units. And they considered various scenarios for inclusionary housing, from a 20% affordable mandate to no mandate whatsoever \u2014 meaning 100% market-rate housing.\u00a0<\/p>\n
The report, issued in May (opens in new tab)<\/a>, was discouraging \u2014 and not just for the concept of inclusionary housing requirements. It concluded that the finances were unfeasible for just about any kind of development, even with zero mandates.\u00a0<\/p>\n For condominium projects, only 1 of 30 scenarios might make financial sense: a midrise building with 130 units, all 100% market rate. For rental properties, none of the various housing projects was workable, even in the case of 100% market rate housing, and \u201ceven if land costs were zero.\u201d In other words, \u201ceven if the land was free, these projects would still be unfeasible,\u201d says Egan.\u00a0<\/p>\n The report received scant media coverage, but in July, the Board of Supervisors voted to slash \u2013 but not eliminate \u2013 the affordable-housing requirement. The rules now require just 5% of units to be priced below market rate, and only for projects with 25 or more units.\u00a0<\/p>\n Part of the challenge with affordable housing requirements is that while they might in theory produce affordable units, in practice they end up reducing the amount of housing that gets built. That\u2019s because they make it significantly more expensive to build.<\/p>\n \u201cAffordable housing typically needs grants or government subsidies to make projects work. And those often have requirements that come with them that raise costs overall,\u201d says David Garcia, deputy policy director at UC Berkeley\u2019s Terner Center for Housing Innovation. \u201cIn San Francisco, requirements like community kitchens or certain labor standards make things more expensive. These are not bad things \u2014 but they come with trade-offs that increase costs.\u201d<\/p>\n According to a Terner Center analysis (opens in new tab)<\/a>, every additional financing source (those grants or subsidies) increases costs by $20,000 per unit \u2014 and it\u2019s not unusual for a Bay Area development that includes affordable housing to have more than 10 subsidy sources. \u201cComplexity increases the cost,\u201d Garcia says.<\/p>\n But what surprised many about the feasibility report was that, even at 100% market rate housing, the numbers don\u2019t work. Which is worth unpacking to understand why the current economics are so challenging \u2014 and why they\u2019re not likely to change anytime soon.\u00a0<\/p>\n Doing the math<\/p>\n Let\u2019s break down the numbers: What does \u201cpenciling out\u201d actually mean? To get something built in this city, there are five factors in play.\u00a0<\/p>\n First, there\u2019s the cost of land. In San Francisco and the Bay Area generally, land is expensive and has been for a long time. Property values have roughly doubled in San Francisco since the 2008 financial crisis and now hover at around $1,000 per square foot of developed property. But the cost of land is hardly the major expense. Even in the Bay Area, land costs represent only around 10% of overall development costs, according to the Terner Center.<\/p>\n Hard costs, on the other hand, account for two-thirds of expenses. Hard costs start with the price of materials: the wood and steel and concrete that go into a building. These costs leaped during the pandemic and have climbed ever since, driven by tariff wars and soaring oil prices. Concrete and lumber prices are roughly 50% higher than they were in 2016.<\/p>\n Labor is another hard cost; wages in the Bay Area are about 50% higher than the national average, due to cost-of-living and workforce shortage issues.\u00a0<\/p>\n All told, most estimates peg the hard costs of construction in San Francisco between $500 and $600 a square foot \u2014 more than anywhere else in the U.S. And even that may be too low. \u201cI used to use the math of $450 to $500 a square foot for a build out,\u201d says Dan Leineweber, founder of Trinity Building Co., a Potrero Hill-based contractor\/developer. \u201cIf it sold for around $1,000 per square foot, then it really easily pencils out. But it can be $600 to $700 just for building costs now. So the math is just significantly harder.\u201c<\/p>\n Then there are the soft costs. These are generally defined as the price of meeting the city\u2019s various rules and red tape. That includes getting plans approved by planning and building departments, environmental reviews, neighborhood meetings, and other hoops. Time is money here; the longer it takes to move from an empty site to finished construction, the more expensive a project gets. Developers complain that these reviews not only take longer in San Francisco but are less predictable. \u201cA project just sits for weeks on end, for months on end sometimes,\u201d says Leineweber. He points to the city\u2019s performance metrics (opens in new tab)<\/a>, which show it takes an average of 119 days for a project to be approved by the Planning Department and 144 days for a building permit to be issued.<\/p>\n OneEstimate, an AI-powered cost-estimation tool, warns contractors about bidding for work in San Francisco (opens in new tab)<\/a>. \u201cEverything is at the top of the range here: the highest trade wages in the country, extreme land costs, strict seismic and energy requirements, and among the slowest permitting in the nation.\u201d<\/p>\n After land and hard and soft costs comes the cost of capital. Most development is financed with borrowed money. Interest rates for construction loans were around 4% five years ago, but today are at record highs: up to 10%. Again, there\u2019s a San Francisco premium in effect: Rates are higher in the city because the costs are higher, so the loans need to be bigger, making any loan riskier. \u201cThe costs of debt service are just brutally high right now,\u201d notes Kennedy.\u00a0<\/p>\n The fifth factor is revenue: how much a developer can expect to sell or rent a unit for. This is where the margin comes in, the profits after all costs are accounted for. This isn\u2019t just profits for the developers. To make the math work, most projects require outside investors. And outside investors expect a return on investment (what\u2019s called the \u201creturn on costs,\u201d or ROC, in industry terms) that compares to (or better than) any other investment. The rule of thumb is that any project needs around a 20% return on costs to justify building. Fall much below that, and a project looks less viable.\u00a0<\/p>\n You can say 20% is greedy, but keep in mind that represents a return over several years of construction and permitting. On an annual basis, it\u2019s more like 6% to 8%, depending on delays. Drop below a 20% margin, and investors and banks will just put their money elsewhere. The S&P 500, for instance, has averaged nearly a 14% annual return over the past decade. Institutional investors typically expect annual returns of 6% to 7%.<\/p>\n \u201cWe could do 15%, but we\u2019d have to do it on a quicker turn,\u201d says Leineweber. \u201cIf we can do multiple projects at a time and get 15%, that would be fine. But I can\u2019t spend three or four years on a project to just get 15%.\u201d<\/p>\n Before beginning a project, a developer runs the numbers through what\u2019s called a pro forma analysis. Every project involves slightly different circumstances, materials, permitting and planning considerations, and potential sale price. If the pro forma shows a 20% return on cost, the developer\u2019s in business. But if it slips far below that, or edges into single digits, the economics become impossible. Loans are harder to get. Investors are harder to find. It doesn\u2019t pencil out.<\/p>\n And lest you think this is just spin from developers looking for a quicker path to profit, you don\u2019t have to take their word for it. In 2023, the Terner Center issued a report (\u201cMaking it Pencil (opens in new tab)<\/a>\u201d) that found the economics have gotten worse in every area: hard costs, soft costs, and cost of capital. In the Bay Area, the report concluded, \u201cproject viability [is] nearly impossible.\u201d\u00a0<\/p>\n And it\u2019s only worsened in the three years since that analysis. \u201cEven in the best circumstances, it\u2019s super hard,\u201d Garcia says. \u201cThrow any complexity in, and you lose the ability to pencil it out.\u201d<\/p>\n In today\u2019s San Francisco and the greater Bay Area, this is the reality. So the question becomes, how do you change the equation? What tweaks, large or small, might make the math work?<\/p>\n A map that runs the numbers<\/p>\n If today\u2019s San Francisco has an epicenter, it\u2019s likely Frontier Tower, at Sixth and Market. The building, constructed in 1908 out of the rubble of the 1906 earthquake, is a hub of the nerd elite. The managers brag about it being \u201c16 floors of AI, crypto, biotech, robotics, neurotech, and longevity.\u201d Startups there are dubbed \u201ccitizens\u201d of \u201ca decentralized network society.\u201d\u00a0<\/p>\n![\"Three](\"https:\/\/www.newsbeep.com\/us-ca\/wp-content\/uploads\/2026\/10\/1793454049_492_-S3840x2560-FPNG.png\"\/)
New infill housing can complement existing neighborhood stock, like these low-rise and mid-rise apartment buildings on Stockton. | Source: Minh Connors for The Standard<\/p>\n
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The City Science Lab San Francisco team (Kate Connally, Peter Hirshberg and Mathew Larson) aim to change the math of building housing in the city. | Source: Amanda Andrade-Rhoades\/The Standard<\/p>\n![\"A](\"https:\/\/www.newsbeep.com\/us-ca\/wp-content\/uploads\/2026\/10\/-S3840x1749-FPNG.png\"\/)
A screenshot from CS@SF\u2019s model shows nearly 93,000 small lots that might be candidates for missing-middle housing.<\/p>\n![\"Building](\"https:\/\/www.newsbeep.com\/us-ca\/wp-content\/uploads\/2026\/10\/-S3840x2499-FPNG.png\"\/)
A floor-plan for small-scale apartment buildings that developer Patrick Kennedy envisions could be pre-approved and adopted widely, like open-source software. | Source: Courtesy Isaiah Stackhouse of SDT Architects<\/p>\n