Soaring Building Costs Are Slowing Housing Recovery

Timothy L. Coyle
Consultant specializing in housing issues

By all accounts, California is in the depths of a crisis.  Affordable housing can’t be found in the state’s growing job centers – enjoying an economic renaissance of sorts but with no place to house a burgeoning workforce.  To preserve that welcome growth, now, more than ever, there is a need to build additional housing, everywhere – paying particular attention to lower-income households.

Surely, lots of local land-use laws and policies will have to change to help accomplish a new level of production.  For starters, zoning rules in some communities will need to be amended to allow for higher densities. However, that, despite the contention of some, doesn’t mean the wholesale destruction of existing single-family homes to make way for high-rise apartments.  Nevertheless, the limited supplies of developable land in some urban areas dictate that some neighborhoods in California will definitely be affected.     

Then, the market’s got to be allowed to work some of its magic – the to and fro of what goes on there must be permitted to take place.  And, the right signals by government must be sent – to landlords, developers and housing consumers of all kinds – so they may be acted upon in due time.  That’s the way markets work.

To that end, vacancies – and rehab – need to be a part of the production calculation, particularly where lower-income housing is involved.  Consider that one household’s decision to leave a rental unit creates another’s decision to move in right behind. That cycle should be repeated over and over again in healthy markets.  What happens in unhealthy markets, where there is too much supply? Consumer choices expand and prices and rents soften. Too little supply (like what is happening now in California)? Choices are reduced and prices rise.

What happens, though, when there are (seemingly unusual) distortions in the market?  Like construction costs? We know, for example, that pure private-market costs run on average about $150 per square foot.  Add in land costs, various local fees and other exactions – plus the forces of extreme demand against the limited supply we have right now – and you can easily see why the typical newly constructed home in California sells for more than $500,000.

That’s what it costs for single-family homes, though – it’s twice as much for multifamily housing.  According to recent surveys, market-rate multifamily housing costs $300 a square foot in most California communities.  Indeed, despite assertions to the contrary, costs are high in downtown areas. Land, for starters, is extremely expensive.  Amounts in excess of $4 million an acre are not unusual. Add to that the cost of design, construction (steel and concrete replacing sticks and bricks) and labor and you’re talking real money.

But, make it affordable (to lower-income households) and watch the costs soar.  First, attach an affordability covenant – deeply discounting rents for 55 years or more – and completely remove all market tension.  That takes a lot of dough.

Secondly, local approvals of the development add considerable cost.  Permitting, for instance, is excessive – especially ever-changing design requirements.  The City of Los Angeles, for example, just adopted a requirement that all new buildings be equipped with solar panels.

Lastly, count on neighborhood groups, armed with the lawsuit-friendly California Environmental Quality Act (CEQA), to sue to stop or modify the project, adding precious time and cost to its completion.  It’s so insidious that it’s become routine in the state to face the NIMBYs in court. So, don’t be surprised to learn that typical project pro forma’s in major markets now include line items of $1 million or more to cover expected litigation. 

Construction costs are so prohibitively high now that there is no way California can build its way out of its current housing mess without some things radically changing.  If Governor Newsom’s target – 3.5 million new housing units by 2025 – is the right number, and only half of them are multifamily, the cost of construction will run into the 10s of billions of dollars each year, making the current statewide bond amounts a mere spit in the ocean.

Something’s got to give.  

Here’s what the state can do to begin to offer some relief – to restore sensible annual housing production:

  • Provide financial incentives to local governments to build – instead of giving away billions of housing money, infrastructure dollars, say, are more meaningful to locals;
  • Bring back redevelopment – place a priority on housing and let the local governments collect all the money they earn; and
  • Repeal CEQA – stop the madness of NIMBY litigation.

The state should take these steps then see what happens in five years.

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