SF is one of the most expensive places in the world to build housing
December 9, 2019
After six years of looking for an affordable apartment in San Francisco, Adrian Caratowsa won the lottery for a city-subsidized apartment in the Transbay district.
As reported in the San Francisco Chronicle, Caratowsa, who at one time lived in a South of Market warehouse with 27 roommates, currently pays about $1,000 a month for a one-bedroom on Fremont St. Nearly 70 people applied for each apartment in the building.
The thing is that San Francisco is struggling with producing enough housing for people like Caratowsa. The major cost of building in the city means that developers can’t create enough affordable or market-rate homes. Over 30,000 homes have been approved but haven’t yet begun construction, as developers try to find financing and enough workers to build.
The Chronicle found several factors that contribute to San Francisco’s surging housing development costs with the help of interviews with experts in the building industry and a review of the data. They point to a worker shortage, long waits for permits, restrictive zoning and high fees, among other things.
Caratowsa lives in Natalie Gubb Commons, a project that cost $58 million to design, obtain approvals for and build. Nonprofit developer Mercy Housing received federal, state and city financing to build the project at a cost of almost $500,000 per unit. The per unit price would have been much higher if the city hadn’t donated the land. The cost to build one new apartment or condo unit in San Francisco today is at least $700,000, nearly triple what it cost about 10 years ago.
This year, San Francisco has the highest construction costs in the world, according to consulting firm Turner & Townsend.
Construction costs are one of the main reasons that so little housing is getting built in San Francisco. Land costs can change, but on average account for about 20% of the budget. professionals.
Developer Patrick Kennedy of Panoramic Interests said market-rate developers seek around 5% annual returns, which means that an apartment that costs $750,000 to build, must generate $37,500 a year after operating expenses and taxes. Rents would then be $5,000 a month for it to be feasible to build.
Construction workers needed to build new housing must earn enough to afford living in the area.
Workers who move to the Bay Area from another state require extensive training. They don’t know the local building codes or earthquake safety requirements, said Joseph Olla, a vice president at San Francisco general contractor Nibbi Brothers.
That level of inexperience has added to the overall cost of labor, said Kennedy.
According to the McKinsey Institute, the construction industry’s labor productivity grew only 1% per year over the last 20 years, compared with 2.8% for the total world economy.
“We’re building wood framing pretty much the same way we did in 1833,” Kennedy said.
Also, San Francisco has among the highest land costs in the nation. Massive land costs are partly tied to how few areas in the city are zoned for apartments. Buildings with three or more apartments are allowed on only about a quarter of San Francisco’s land.
“If there’s a limited area where you are allowed to build multifamily, the prices for those areas are going to be much higher than they would be otherwise,” said David Garcia, policy director at UC Berkeley’s Terner Center for Housing Innovation. Allowing apartments in more areas could bring down the cost of housing, he said.
Residents in new housing use transit, parks, schools, police and other services, so cities charge fees to offset the costs.
“We are trying to solve so many problems —all important — through housing” that it’s costing a lot, said Doug Shoemaker, president of Mercy Housing, the nonprofit developer that built Natalie Gubb Commons.
San Francisco fees add up to around $50,000 per unit for market-rate projects in the most active development areas, according to the Planning Department.
Another factor driving up costs is San Francisco’s approval process. Developers say it is one of the most difficult in the world. Opponents of projects can easily delay them by requesting additional reviews or filing lawsuits.
Kennedy of Panoramic said these rules boost the cost of housing. “The lack of housing is a largely self-inflicted problem,” he said.
Affordable projects can cost more per unit than some market-rate projects. They have additional open space and disabled-accessibility requirements, and there’s pressure for top-notch design, said Garcia of Terner Center.
“We have really high expectations of design quality that range from incredibly important to probably unnecessary,” Shoemaker said.
San Francisco and California could make it less expensive to build housing by streamlining approvals, experts say. The city could adopt more “area plans,” which can speed up the process by establishing ground rules, and local officials and state legislatures could limit the ability of opponents to delay projects.
“Cities don’t control the price of materials and labor,” Garcia said, but they do have the authority to speed up approvals.
Another way to save money is by reducing parking requirements. Each space costs $50,000 to $100,000, Kennedy said.
Unfortunately, costs will likely keep rising.
A San Francisco high-rise can now cost $1 million per apartment to build, about 20% higher than what is feasible, said Oz Erickson, chairman of developer Emerald Fund. With rents and home prices hitting a plateau and costs continuing to climb, he said, development is approaching “impossible.”
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