For decades, development investors didn’t want to touch Oakland. In 1997, one economist called the city an “ugly duckling in a bay of swans.” But these days, Oakland is one of the “hottest,” or fastest-growing, real estate markets in the country.
And developers want in on the action: there are more than 15,000 housing units in the pipeline right now – triple the number built over the last fifteen years. Anti-displacement activists see an opportunity for the city to demand public benefits from developers – things like pitching in to pay for affordable housing, hiring only local workers, or investing in public beautification. The city has leverage. But how far can it push developers before they back out?
One deal the city just made says a lot about the climate of negotiations. The land is a city-owned parking lot at 23rd and Valdez near downtown. It’s two blocks from the strip of Telegraph that was put on the map by the popular First Fridays festival, and it's close to gentrified residential neighborhoods.
Curbing the housing shortage is one of the Schaaf administration’s top priorities. She cites the fact that for every 10 new jobs the region has created it’s only added one new unit of housing. To the city, emptier commercial areas like the ones that surround 23rd and Valdez are ideal for development, because there’s no one there to displace.
But for developers, to buy this lot for construction is to make a bet: that people will actually want to live here. Bruce Dorfman is the developer who made that bet. But, he says, “it is a tough sell to get investors on board. It’s not a small task.”
Dorfman is principal at Thompson Dorfman. It has over 20 buildings in the Bay Area – big, recognizable ones like the Bay Street mall in Emeryville. But this is his first in Oakland because, he says, the time is finally right.
“It’s actually changed in the past year or 18 months where suddenly institutional investors are saying, ‘Yeah, we understand the story. Oakland has turned the bend.’ That's a new phenomena.”
The city has done a lot to try to induce construction. It’s created neighborhood plans for the areas that need to grow. It’s updated zoning and taken care of environmental assessments, so developers don’t have to. The parking lot at 23rd and Valdez is part of a plan that’s been in the works for years.
“The plan basically opened up that area for this type of housing,” says Dorfman. “They’re going to create a neighborhood.” Without that plan, he says he’d never have even considered building here.
So, the city makes it a little easier for developers, the developers get interested – so far so good. But those aren’t the only two players. The city’s also got all kinds of pressure from the public to not sell out their town.
Some activists think the city shouldn’t sell off land that’s publicly owned, like the parking lot we’re talking about, without asking for community benefits in exchange – like help with building affordable housing.
So the city has to do a balancing act: keep developers and their investors interested, while leveraging that interest to get some benefits the public wants.
So how did this deal go down? First, the city made concessions. For starters, it agreed to a closed negotiation process with one developer – Dorfman. He was interested, the city didn’t want to lose him, so they committed and sold the parcel for $9.5 million. The price of the land was determined by an appraisal, rather than by auction, so there was no bidding.
“There are certain things that we’re doing that benefit the developer,” says Patrick Lane. He is the city staffer who negotiated the deal. His background is in affordable housing. He has an earring. His uncle calls him a communist. But he thinks the city did the right thing here.
“Our goal is to build the housing; it's not to get the best deal possible,” he says. “It’s to get a good deal and get the housing done as well.”
Part of that deal is that no money will change hands until right before building starts. This saves the developer a lot of money – he isn’t carrying the costs of owning land right now – but the city also has a chance to back out if things go wrong. Both sides are worried about the region’s housing boom going bust.
“We don’t want to sell the property until we’re ready to go,” says Lane. “We actually have to make sure that it gets built, and we have to have mechanisms in place to take it back if it doesn’t get built.”
So that’s what the city gave. What did it get?
For 15% of the housing – that’s 36 out of the 234 units – Dorfman won’t charge market rate, and he’ll make sure that those units go to low income people. It was a savvy move on Dorfman’s part, because the public has gotten organized.
Over 100 people spoke up at a recent city council meeting to point out that Oakland is one of the only Bay Area cities that does not have rules forcing developers to help pay for affordable housing. They’re pushing the city to create something called an impact fee.
The fee basically says to developers: your housing project will bring people to this community who will use public infrastructure like parks and transportation. They’ll also use services like cafes and grocery stores staffed by low wage workers who need to live in publicly subsidized housing. The idea is that developers should help to mitigate that impact by paying up.
Without these rules, the city negotiates on a case-by-case basis, and when the public doesn’t like what’s happening it can cause delays that can put a project under water. In fact, two other projects are stuck right now. Time is money, and Dorfman circumvented all that by agreeing 15% affordable housing up front. For some activists, that’s not enough. But Oakland’s Patrick Lane says it’s the most the city can expect.
“They wouldn’t do more than the 15%,” he says. “We looked at their financials closely. So, we really think we got a good deal.”
Lane says it’s the investors, not developers, who walk away when a project becomes too costly. And investors can go to any market in the world; they don’t have to play by our local rules.
“You can't dictate what people will invest, so if you want their money to build the housing, you have to take what they’re willing to spend it on,” he says.
The rents in the new development will be expensive. One-bedrooms will go for $2,600. The subsidized one-bedroom units will go for $1,400, and the extra-subsidized will go for $870. Housing researcher and advocate Gloria Bruce says there’s no way to bring down the market rate prices. So, the city needs to look at other solutions.
“I really think we need to be looking at approaches that are outside of the market,” she says, “and, when we can, looking at nonprofit development.”
Why didn’t the city sell the land to a nonprofit developer? Patrick Lane says, basically, if the city doesn’t get construction rolling ASAP, it could miss this boom and miss all the revenue that comes from selling land and collecting property taxes. With that money Oakland could fund anti-displacement efforts and build affordable housing on less expensive land.
Construction at 23rd and Valdez should break ground in about a year – assuming the developers get investors on board. If they do pull it off, it will prove that including 15% affordable housing is viable in Oakland. And remember, they finalized this deal before Oakland’s market heated up. So, right now that bet is only looking safer.