The shadow of success: Inside Silicon Valley’s affordable housing crisis

A tech boom in Silicon Valley is spurring rapid economic growth. But the newly created jobs span vastly different income levels.

What happens when the majority of the region’s workforce can’t afford to live here?

Story by Lauren Hepler

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Jennifer Kelly used to seek refuge in her $1,750-a-month, two-bedroom downtown Campbell home.

The former tech sales manager, who made up to $180,000 a year working at startups during the last decade, had a routine of working out on her in-home Stairmaster or taking joy rides in her sports car to relax after 14-hour workdays.

Now Kelly, who didn’t want her real name used for this story, is stringing together short-term contract work and sleeping in an aging SUV that she parks on a rotating slate of dead-end streets in Silicon Valley.

“Professionally, I’m at director level,” she said. “I had a safety net.”

Two neurosurgeries and a layoff, compounded by rising housing costs, have made Kelly, 51, a vivid personification of Silicon Valley’s affordable housing crisis. The region’s high cost of housing affects residents at all pay grades with varying degrees of severity. It also hamstrings employers looking to lure talent to one of the country’s most expensive real estate markets.

Silicon Valley’s tech-fueled prosperity — in combination with a failure by local governments, developers and employers to ensure that housing supply can meet demand — leaves the region vulnerable to talent poaching from less-expensive markets. It also manifests day-to-day with productivity-sapping traffic caused by commuters who clog the freeways driving from more affordable fringe cities.

Meanwhile, the economic growth fueling the affordable housing crisis continues to accelerate. The Bay Area Council estimates that every high tech job added to the local economy creates four jobs in support services fields.

“It’s sort of the shadow of our success,” said Matt Franklin, president of Foster City affordable housing developer MidPen Housing. “If we want to have a sustainable regional economy, we have to address the affordable housing crisis.”

Stagnation During a Crisis

“We want to make sure the talent we’re recruiting has somewhere to live.”

For each of the last 11 years, Silicon Valley CEOs have pinpointed affordable housing as their No. 1 challenge in an annual survey administered by tech-heavy business advocacy organization the Silicon Valley Leadership Group. Click here to see last year’s survey.

While local cities slowly seek new revenue streams to augment affordable housing budgets eviscerated by recent cuts, businesses have yet to articulate a plan of their own for easing the current crunch.

Nine of the region’s top 10 non-government employers declined to make an executive available for an on-the-record interview about potential housing investments or housing-related recruiting initiatives, including: Kaiser Permanente, Apple Inc., Stanford University (and its medical division), Google Inc., Oracle Corp., Lockheed Martin Corp., Intel Corp. and Hewlett-Packard Co.

Carl Guardino, CEO of business advocacy group the Silicon Valley Leadership Group, says companies may be leery of talking on the record for competitive reasons. Recent anti-tech protests concentrated in San Francisco have also inflamed the politically-charged issues of gentrification and rising housing costs.

Only Cisco Systems Inc., the region’s top employer with more than 16,450 employees, was willing to talk on the record. Cisco has invested millions annually in emergency services linked to homelessness, food security and health. That work led the company to the issue of affordable housing, said Senior Community Relations Manager Ricardo Benavidez.

Cisco has invested a total of $2.5 million in Housing Trust Silicon Valley since 2000 — an investment aimed at alleviating some of the pressure in a chaotic real estate market where demand for new units comes from low-income workers and well-paid tech talent alike.

“We want to make sure the talent we’re recruiting has somewhere to live,” Benavidez said. “That is definitely part of our thought process.”

How We Got Here

“There’s this misconception about job growth. A housing shortage will inevitably lead to a crisis in the workforce.”

Tina Marsalis was ecstatic when she found a three-bedroom, two-bathroom house in downtown San Jose renting for $2,190 a month during late 2013.

The catch: she and her fiancé share the living room, since it takes a total of six individual incomes — her fiancé’s earnings as a night shift security guard, her three adult children’s minimum wage restaurant pay, her disability payments (stemming from three knee surgeries) and a sixth roommate’s paycheck from temp work — to make rent.

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Overcrowding and homelessness are two severe but increasingly common symptoms of unaffordable housing in Silicon Valley (read more about those issues here). But the term “affordable housing” is a slippery one that means different things to different people.

Broadly speaking, housing is deemed “affordable” when costs associated eat up less than about one-third of yearly income. Governments also subsidize designated affordable units, often in a bid to house those making less than 50 percent of the area’s median income.

“That’s the housing that doesn’t get built otherwise,” said Housing Trust Silicon Valley CEO Kevin Zwick. “It’s a market failure.”

Although average rents in Silicon Valley reached peaks similar to the current $2,000-plus range during the dot-com boom, the prospects for easing the region’s housing crunch have never been murkier.

Housing is undoubtedly a perennial issue in many major metropolitan areas, but local funding cuts over the last five years — most notably the loss of $1 billion a year from now-defunct statewide redevelopment agencies — plunged new affordable housing approvals in Silicon Valley to a 15-year low during 2012.

The region’s economic recovery won’t propel the region out of the problem. Quite the opposite. State employment projections show that more than 50 percent of jobs added in Silicon Valley from 2008 to 2018 will pay less than $50,000 a year.

“There’s this misconception about job growth,” said Kate Comfort-Harr, executive director of San Mateo nonprofit HIP Housing. “A housing shortage will inevitably lead to a crisis in the workforce.”

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(Click here to see wage information for other occupations, per the California Employment Development Department)

The Rental Boom

Underlying Silicon Valley’s dearth of affordable housing is a broader market shift toward rental housing that has increased competition at all income levels.

On top of lower-income earners who often lack the funds to buy a home, real estate trend reports document high-earning professionals craving dense, urban apartment living. Former residents of foreclosed homes in the area add to rental demand.

More than 30,000 residential foreclosures occurred in Silicon Valley from 2008 to 2012. Census data shows that the number of renters in Santa Clara County alone climbed to 255,906 in 2010 — a 12.6 percent 10-year increase — though Franklin quotes an estimate that rental demand throughout Silicon Valley is up as much as 20 percent since 2008.

One recent 60-unit affordable development that MidPen opened on the Peninsula drew more than 2,000 applicants, resulting in a lottery to determine who won housing. Those unable to secure an affordable unit often attempt long commutes or spend a huge proportion of yearly income on higher rents, sometimes sacrificing necessities like healthcare, Franklin said.

In 2013 alone, rents in the San Jose metro area grew more than 10 percent. That increase made the city No. 2 for cost increases nationwide, according to apartment data provider RealFacts.

The region also posted a low three percent vacancy rate last year. That’s despite the fact that about 3,500 new rental units came online, according to a report titled “Technology Salaries Pushing San Jose Rent Ceiling Higher” by real estate services firm Marcus & Millichap.

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The Jobs-Housing Mismatch    

“We’re going to have crowded freeways. We’re going to pollute the environment. We’re going to force low-income workers to spend a lot of money not just on housing but on transportation.”

Cristin Sitterly is a homeowner who goes way out of her way to avoid housing costs that cut too far into the six-figure salary she earns as a veteran nurse at Stanford.

Each week, Sitterly commutes about five hours round trip from her home in Roseville to work three days of 12-hour shifts in a row as a labor and delivery nurse at Stanford. Her husband works for AT&T in Mountain View and the two share a small Palo Alto apartment to use while working in the area in addition to their Roseville home. They work opposite hours during the week and see each other mostly on weekends and holidays.

“It’s not ideal,” said Sitterly, who grew up on the Peninsula. “I would love to live five minutes from work.”

Her roughly 130-mile commute from Roseville to Stanford reflects a broader geographic mismatch between jobs and housing in Silicon Valley.

Sitterly is one of an estimated 111,285 “megacommuters” to Santa Clara County — a term recently coined by demographers to denote people that commute more than 50 miles from home to work. In Santa Clara County, that figure accounted for about 12.9 percent of workers as of 2011, according to U.S. Census data. About 13.6 percent of workers in San Mateo County commuted more than 50 miles in 2011.

Click here to explore Census commute data for other areas.

Qualified homebuyers like Sitterly represent lost potential investment in the region, since she pays property taxes and lives most of the week in Roseville.

And long commute times affect workers in all occupations.

“If we build our housing far away from jobs, then that’s going to create a lot of unintended consequences,” Franklin said. “We’re going to have crowded freeways. We’re going to pollute the environment. We’re going to force low-income workers to spend a lot of money not just on housing but on transportation.”

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(Source: U.S. Census Bureau)

Though Sitterly is at the top of the pay scale for nurses in her group, where salaries range from about $120,000-$180,000 annually, she was unable to find an appealing home in her price range when she was house hunting in the early 2000s. She opted to buy a four-bedroom, 2,000 square-foot home in Roseville for about $250,000 in 2001 instead of paying “half a million dollars for a little bungalow in Redwood City.”

She and her husband now also pay $1,800 a month for their workweek Palo Alto studio apartment.

Sitterly looked briefly for work in the Roseville area to minimize the commute time but could not stomach the potential pay cut. Leaving Stanford is no longer an option due to the high salary and benefits not available elsewhere.

How long Sitterly and her fellow megacommuters are willing to put up with the costly workarounds is one long-term question facing the region.

“Most people say, ‘if you can’t afford to live here, you live somewhere else. That’s market forces,’” said Kate Comfort-Harr, executive director of San Mateo housing services provider HIP Housing. “We’re going to hit a wall. I don’t know that anybody else has ever experienced that.”

The Talent Quagmire 

“We train them for two or three years, and they either leave for the competition or say ‘Hey, company X in the Valley, please transfer us to our Oregon facility.’”

Commutes that grate on employee morale threaten retention rates for area businesses. Another challenge is getting workers to take the initial plunge and move here in the first place.

In Silicon Valley, even pay packages with a 50 percent premium over other markets may not entice professionals who can buy more elsewhere.

“It still doesn’t make up for, ‘Hey, I had twice the home and half the cost,’” Guardino said.

Those tradeoffs go for renters, too. Young workers in fields like engineering start with a salary around $100,000 in Silicon Valley, allowing them to afford a nice room in an expensive shared rental. But workers’ tolerance for that lifestyle doesn’t last.

“They don’t mind dorm life in a rental house or apartment for a few years,” Guardino said. “We train them for two or three years, and they either leave for the competition or say ‘Hey, company X in the Valley, please transfer us to our Oregon facility.’”

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(Click here for more data on nationwide rents from the National Low Income Housing Coalition. Click here to get more information about home sales from the California Association of Realtors).

Some companies, like Palo Alto-based Palantir Technologies Inc., subsidize housing for employees who live close to work. Other employers offer the option to telecommute instead of sitting in traffic jams. Some tech companies, such as Google, Facebook and Yahoo, famously charter private buses to shuttle tech workers from around the Bay Area to their corporate campuses with productivity-minded Wi-Fi accessibility.

Guardino points to Housing Trust Silicon Valley — a nonprofit founded during the dot-com boom to finance affordable housing — as the most concrete example of businesses anteing up on housing.

On top of Cisco’s investment in the Housing Trust, Applied Materials Inc., Adobe Systems Inc. and Hewlett-Packard have each invested at least $1 million in the group. (Businesses have also acted independently. Google has invested about $100 million in various affordable housing initiatives across the country.)  

Still, the Housing Trust estimates that Santa Clara County currently faces a $220 million annual affordable housing funding shortfall. Zwick hopes to make a dent in that number by rebranding housing as an investment vehicle instead of charity work.

“Companies in Silicon Valley have very healthy treasuries,” Zwick said. “They could do a lot if they wanted to take a small percent of that and invest it with the Housing Trust. They would get the same return they’re getting now on CDs and treasury bonds.”

Closing the Gap 

“I think we ought to have a transfer tax on anybody who sells a piece of property. I think we should consider an addition to sales tax to create money.”

With the precipitous drop-off in available affordable housing funds, Silicon Valley is at a new crossroads: Determining who will pay to house the region’s low-income residents.

It would take about $269 million annually to produce a government-recommended 1,482 new affordable units for the very low-income in Santa Clara County alone, according to research by Housing Trust Silicon Valley. As of 2013, affordable housing developers in the county had about $47 million at their disposal, which could theoretically finance about 313 new affordable units in a year.

On top of hopes that large employers may fill a portion of that funding gap, state policymakers are eying changes to controversial regulations. Local cities are also mulling new developer fees.

Perhaps the biggest lump sum on the table is $500 million annually that could be generated from a new statewide $75 real estate document recording fee. Realtors have opposed that measure, previously deemed SB 391, causing it to stall in Sacramento.

At the local level, housing impact fees — where developers of market-rate housing pay an assessment that supports less-expensive housing — are currently being evaluated by cities including San Jose, Sunnyvale and East Palo Alto.

Mountain View implemented a $10 per-square-foot fee on new market rate rental housing during early 2013. Community Development Director Randy Tsuda said the city has yet to see any detrimental effects.

“None,” Tsuda said. “In a market like Mountain View, the demand and developer interest is so high.”

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Some in the building industry still question the impact fee approach. 

Robert Freed, president and CEO of apartment and home developer SummerHill Homes, is a board member for San Francisco affordable housing developer Bridge Housing. 

“It’s not an impact fee. It’s a tax,” Freed said. “It is politically easy, if you will, to pin the fundraising side of the affordable housing equation to new development.”

Instead, he suggests broader funding mechanisms.

“I think we ought to have a transfer tax on anybody who sells a piece of property. I think we should consider an addition to sales tax to create money.”

Realtors, meanwhile, are against the transfer tax idea.

An Uncertain Future

“It’s sort of the shadow of our success. If we want to have a sustainable regional economy, we have to address the affordable housing crisis.”

While policymakers, businesses and developers work through the politics of affordable housing, Jennifer Kelly is already out of options.

Before she found herself without a place to live, she tried downsizing from her home in Campbell to a cheaper San Jose apartment. Last summer, Kelly downsized again to a $550 per month room in an East San Jose apartment where a woman and her three children lived in the master bedroom.

She has been living out of her car for about a month now, constantly looking for work on a smartphone a family member paid for as a Christmas gift.

“You have to focus on the biggest priority right now,” Kelly said. “I need to get a job. Then I need to find a place to live.”

Until then, her interview clothes double as curtains inside the car that now serves as her Silicon Valley home of last resort.

Click here to read on our site.

READ MORE:

How economic growth is fueling Silicon Valley’s housing crunch

SVLG CEO Guardino on how Silicon Valley’s affordable housing crisis is a business issue

Affordable housing crunch: Silicon Valley cities weigh new developer fees

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Contact Lauren Hepler at lhepler@bizjournals.com or 408.299.1820

Contributing Data Reporter: Bryce Druzin at bdruzin@bizjournals.com

Contact the editor Alex J. Martin at amartin@bizjournals.com

Graphic Design: Doug Magill and Hannah Hitchcock

Notes

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