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San Francisco landlords are turning ‘crappy old storage rooms’ into apartments—and it’s good news for the city

Aerial view of residential area of San Francisco just outside the downtown district.
DianeBentleyRaymond | Getty Images
Aerial view of residential area of San Francisco just outside the downtown district.

In 2014, San Francisco passed legislation allowing property owners to add accessory dwelling units, or ADUs, to their homes and buildings. The law was then expanded in late 2016 so that any building with at least five existing apartments could add an unlimited number of units, the San Francisco Chronicle reports.

As property owners take advantage of the new law, the city has seen an explosion of ADUs over the past year. "There are now 1,046 ADUs in the pipeline, with building permits approved for 531 of them," according to the Chronicle.

These units, often called "granny flats," typically consist of converted garages or basements. "Pretty much every multi-unit building with crappy old storage rooms is taking a look at this," John Pollard of the SF Garage Co. told the Chronicle. "You've got all these property owners that realize they are sitting on dead equity."

That means everything from a boiler room to basement storage has the potential to become a new housing unit. One landlord in San Francisco's Nob Hill neighborhood is turning a ground-floor dining hall into seven individual units, the Chronicle reports. The apartments will be between 220 and 381 square feet and cost anywhere from $2,400 to $2,800 a month.

At face value, the prospect of paying top dollar to live in what was once a "crappy old storage room" might not sound appealing but ADUs are much needed housing options to an area desperate for them. And with San Francisco's median rental price climbing to $4,400 a month, the price isn't as outlandish as it may seem.

"The new laws won't come close to filling the Bay Area's housing needs. But they could create options for middle-income renters who don't qualify for below-market-rate housing and can't afford a market-rate apartment," the San Francisco Chronicle reported in late 2016 as the law was about to take effect.

The cost of living and the housing crisis in San Francisco are a pressing issue, and not just for the working and middle class.

When Houston-based law firm Patterson and Sheridan expanded to Silicon Valley, it opted to keep employees in Texas rather than have relocate to California. Now the lawyers commute once a month for meetings on a nine-seat, $3 million jet equipped with maple-paneled cabins and plush leather seats. It was, remarkably, the cost-effective decision.

Even with the cost of the jet, plus the $2,500 per hour cost to operate it, the firm says it can offer clients lower prices because most of the work is done in Houston, where commercial real estate is 43 percent cheaper, salaries are 52 percent lower and competition for technical talent less fierce, according to an original report in the Houston Chronicle.

Meanwhile, employees at local tech behemoths like Twitter and Facebook have reported struggling to make ends meet. Earlier this year, one Twitter employee earning a $160,000 salary told The Guardian that he's barely scraping by in Silicon Valley.

The employee's biggest expense is the $3,000 monthly rent he pays on a two-bedroom house where he lives with his wife and two kids, which he describes as "ultra cheap."

"Families are priced out of the market," he says, explaining that it's hard to compete with the hordes of 20-somethings willing to pile into a shared house — and still pay $2,000 per person for a room.

Turning unused space into rentable units could be part of a solution. It also allows families to create more affordable housing options for extended family members, live-in nannies or caretakers for aging parents.

With the median home value in San Francisco reaching over $1 million, it could also help property owners pay off expensive mortgages.

"Adding an ADU to your property can provide several benefits, such as providing housing for family members, simplifying your lifestyle, and increased financial flexibility," the San Francisco Planning Department says on their website.

However, according to the San Francisco Housing Action Coalition, the "legalization of ADUs did not lead to the increase of units in single family home (SFH) neighborhoods that the City anticipated." Rather, the majority of ADU permits were for additions to larger buildings. That's partly why both San Francisco and California overall still have a way to go to solve the housing crisis. But it seems ADUs are a step in the right direction.

"We've created a new asset class in the housing market — someone is going to step up and make a lot of money financing these things," Matt Regan, senior vice president of housing policy at the Bay Area Council, a business-sponsored, public policy advocacy group, told Business Insider.

"Someone's going to crack this nut very quickly."

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