Why do so few people work on the high rent problem?

Jon Dishotsky
Jan 5, 2016 · 5 min read

The rent in San Francisco is very high, everyone accepts it as a fact of life. It’s tragic comedy that seems to affect anyone and everyone. I remember overhearing a conversation in a coffee shop in New Orleans where two people were working on laptops, enjoying an espresso. They were talking about moving to San Francisco but both agreed it was too expensive to move there. That broke my heart. I wanted to walk over to them and say, “I will put you up for a few weeks!”

The challenge is that the majority of smart people that come here want to work on software or businesses that support software. This is the mecca of software, after all.

I don’t blame them. The physical world has lots of challenges and is very expensive. Those challenges always include gravity, physics, zoning, and sometimes include politics, emotions, and fear. Even so, I don’t think it’s a complicated problem to fix.

In order to experiment with new ways of building housing you would have to…build housing. That seems obvious but it’s an important point.

If you build software, you can write code and put a product out there quite quickly and cheaply. The constraints are limited. That is not to say it’s not challenging, however the cost to achieve minimum viable product in software vs. a physical building is two or three orders of magnitude in difference. Let me give you an example.

Software vs. Buildings

SOFTWARE

Bret Taylor and his team of 27 employees built Quip by first bootstrapping and raising $15M, prior to their most recent round. Quip is used by “millions of individuals” (by the way this is insanely awesome and not the norm, but a good example nonetheless).

It cost Quip and their investors $15M to get their product in the hands of “millions of individuals.”

Let’s say “millions of customers” = 1,000,000 for the purposes of this analysis.

BUILDINGS

To build studio apartments for 1,000,000 people in San Francisco (or the like) it would cost a founder and investor…

$200 per sf (land) x $300 per sf (construction) x $100 per sf (design, legal and city fees) = $600 per square foot to build.

$600 build cost x 800 square foot studio per customer = $480,000 per studio.

$480,000 x 1,000,000 customers = $480 Billion

OY.

We can argue that the value of productivity applications vs. a place to call home is vastly different. But even if having a home is 1,000x more valuable than having a place to collaborate with your colleagues online, the costs to ship the two different products are way out of whack.

To put it another way, if Bret and his team were focusing on real estate instead of software, his product would be in the hands of…

$15M / $480,000 = 31.25 customers.

That’s too small a sample size to understand if your experiment is a success or failure. Also, I am pretty sure that when Bret left Facebook as CTO he wanted to help more than a classroom full of people. This is the fundamental conundrum with getting people to add brain power to the high rent problem.

Path Forward

We need to find ways to acquire land cheaply, build cheaply, limit soft costs and increase the speed at which healthy buildings get approved. There is no doubt that this is a supply vs. demand problem. There are many in public office including Mayor Ed Lee and Supervisor Scott Wiener who are doing great things, but I believe the private market is falling short. With the city and some non-profits building very low income housing and a ton of awesome luxury high rises going up, it’s clear that everyone in the middle is being left out of the picture.

The goal of real estate development is to meet society’s needs via the built environment. That is clearly not happening here and in a lot of major cities. This effect will pose an existential threat to the greatest cities we live in. If 80% of economic output comes from the urban environment (1), future productivity could be threatened if a fewer people can afford to live in cities.

We need a Space X moment for building housing. Let’s look at it with a fresh set of eyes and a first principles approach.

I think it’s important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. [With analogy] we are doing this because it’s like something else that was done, or it is like what other people are doing. [With first principles] you boil things down to the most fundamental truths…and then reason up from there.” — Elon Musk

We need software and product people who know how to solve problems from their root issues to think about this and throw their hat in the ring.

Also we need to think about our neighbors and lend a hand. I remember sitting at the Commonwealth Club listening to Megan Smith, U.S. CTO talking about public service. She said that everyone should have a tour of duty in public service. It’s part of being a good American. I’d like to make that part of the conversation.

We need smart people to work on this problem. We need people who are willing to solve a problem for the public good.

This is a personal issue for me. I love San Francisco, skyscrapers, cities, the buzz of a metropolis, the grit and the beauty, all of it. I am starting to see friends have to move because they can’t afford to stay and I don’t like it one bit. It’s one project I will be working on and something I care deeply about. I want the kids from New Orleans to move here and my friends to stay. If you’re ready to hear about my experiment shoot me an email and we can talk. If you want to help in any way, please also reach out.

Reference:

(1) http://2014.newclimateeconomy.report/cities/

Jon Dishotsky

Written by

CEO & cofounder, Starcity, I write here now - https://starcity.com/

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