As California struggles to build enough homes for its nearly 40 million residents, developers across the Bay Area could be using a perceived loophole to downsize projects, thanks to a penalty on cities that haven’t yet gained approval for state-mandated housing plans.
In the striking turn of events, developers in San Jose are now using the legal mechanism known as “builder’s remedy” to scale back housing proposals because of difficult economic conditions that have prevented high-density projects from penciling out. The move, which is riling the city’s leadership, could be a sign of things to come for other Bay Area cities.
One development planned at the city’s flea market near the Berryessa BART station initially was going to have up to 3,450 housing units and millions of square feet for commercial use. The new plan? Just 451 townhomes, 399 apartments and 90 condominiums — plus 45,000 square feet of commercial space.
According to the city’s planning department, eight out of the 19 builder’s remedy proposals received so far are calling for a decrease from their original proposal in the number of housing units, though a specific figure for how many units San Jose might lose wasn’t immediately available. Builder’s remedy projects are being proposed across the Bay Area, though it remains unclear how many will ultimately be developed.
The situation is exasperating San Jose Councilmember David Cohen, who claims developers are taking advantage of what he sees as a “loophole that was unintended” in the builder’s remedy law. He estimates the number of lost housing units to be around 5,000.
“I think it’s pretty clear the purpose of the builder’s remedy was to punish cities that don’t build enough housing — if you’re not going to build enough sites, we’re going to let developers build,” said Cohen in an interview. “But it is pretty clear to me that there was never an intent to allow downzoning. I don’t think anyone anticipated someone downzoning.”
Cohen said developers should wait until economic conditions — lower interest rates and falling construction costs — make more sense for greater density.
San Jose’s Mayor Matt Mahan shares the councilmembers’ concerns.
“This proposal doesn’t just cut our Berryessa housing production at the margins — it decimates it,” Mahan wrote in a statement. “San Jose’s future growth demands dense housing and jobs located near transit. The public sector has done our part by investing billions of dollars in the transit infrastructure connecting BART to Berryessa, now it’s time for our development partners to do their part by producing dense housing and jobs near the station as they committed to do.”
But Erik Schoennauer, the land-use consultant for the flea market project, says waiting until the economy improves is wishful thinking.
“Who says conditions are going to improve?” Schoennauer asked. “As long as inflation levels remain elevated, then interest rates are going to remain elevated. So the fundamental question is, how long do you wait? 5 years? 10 years? 20 years?”
In August, California regulators denied San Jose’s plans to build more than 60,000 homes over the next 10 years, citing concerns from community members over inadequate public input on the city’s plans. In addition to the builder’s remedy, San Jose also risks losing out on affordable housing and transportation funding.
The city’s plans to build 62,200 homes by 2031 — half of them affordable — need to have more specificity as to how the proposed sites have a realistic chance of being developed, state officials told the city.
However, current economic forces have significantly depressed residential development and created an exorbitantly expensive building market in San Jose.
In October, the city commissioned a study about the feasibility of both market-rate and affordable housing projects, finding that in every single test case across the city, developers would stand to lose out on hundreds of thousands of dollars per unit.
Schoennauer says two trends are causing developers to scale down their projects. First, there was a major lack of interest in office space at the flea market — even before the pandemic sparked a major rise in office vacancies. Second, townhome-style construction is the only type of housing that investors are interested in right now because of high-interest rates, inflation and construction costs.
High-density developments such as skyscrapers, he explained, are more difficult to finance and carry more risk because they have to be completed all at once. Townhome projects, on the other hand, can be constructed and paid for a few units at a time, at the developer’s own pace. In addition, the flea market’s original project was going to require an estimated $100 million in infrastructure costs, something Schoennauer said makes “no financial sense.”
Agreements made with the current flea market’s vendors — $5 million in financial support, a five-acre urban plaza space to facilitate a public market, and a minimum one-year advance notification of closure of the market — are still in place, he said. And 20% of the newly proposed housing units will be deed-restricted for lower-income households that do not exceed 60% of the area median income.
Other project sites that were submitted to the city with decreased housing units include addresses at 5670 Camden Ave., 5655 Gallup Drive, 1016-1030 Lincoln Ave., 511 Cozy Drive, 210 Baypointe Parkway, 150 River Oaks Parkway and 905 North Capitol Ave., according to planning department officials.