‘Death spiral’: It’s getting obscenely expensive to build housing in San Jose
New report shows how a huge jump in construction prices are stymying projects
It’s no surprise that building housing in San Jose isn’t cheap, but construction costs in the nation’s 12th-largest city are breaking records this year.
A new report commissioned by San Jose officials calls the residential development landscape “bleak” for both market rate and affordable projects, citing “numerous challenges” posed by enormous economic pressures such as historically high interest rates, soaring construction material and labor costs, and other inflation-related issues.
The cost of constructing a single unit of affordable housing in San Jose increased by 24 percent in the last year, from $757,900 to $938,700 — a three-fold increase compared to relatively routine annual increases over the previous decade and a half. When compared to other Bay Area counties such as San Francisco and Alameda, San Jose’s prices are 26 percent higher per unit, which the report attributes to a labor shortage and differences in wage structures.
The report examined the cost feasibility of five different types of properties in San Jose for the second year in a row — and none of them worked out.
The report concluded that potential developers stand to lose hundreds of thousands of dollars in every instance when considering the construction costs of 5-to-22-story market-rate housing projects anywhere in the city. Meanwhile, rents in the region have plateaued or even declined, leaving new projects in the red. According to the city’s study, even a 5% increase in rents or a 5% decrease in construction costs would not make a significant difference.
The deteriorating construction environment comes as housing affordability and homelessness remain top of mind for Bay Area residents. According to a recent poll conducted by this news organization, 75 percent of the region’s registered voters believe homelessness is on the rise.
According to Nanci Klein, the city’s director of economic development, this year’s report can be summed up in a single phrase.
“Worse than last year,” Klein said, joking that the study could have been just those four words. “Unless something crazy changes, we’re not going to get much development, housing or commercial.”
According to CoStar, an international real estate analytics firm, not a single market-rate apartment project broke ground in Silicon Valley during the first half of this year. Rising construction costs have also had an impact on transportation projects, most notably San Jose’s BART extension, which has seen its estimated cost nearly double in the last three years to $12.2 billion, and its opening date pushed back another three years to 2036.
Those involved in both affordable and market-rate housing projects said interest rates, which are at a 20-year high, are the most significant stumbling block in a long chain of dominoes that has stifled development.
“Interest rates have really shut down the capital markets,” said Shawn Milligan, a developer based in San Jose. “You can’t borrow at 9 or 10% and underwrite a project at that rate.” It’s not possible. It was feasible when interest rates were at 3%. It’s turned everything on its head.”
According to Louis Mirante, vice president of public policy at the Bay Area Council, this has created a vicious cycle.
“The fewer projects, the less labor there is,” he went on to say. “The fewer projects there are, the less labor there is.” The death spiral continues.”
However, the report discovered that there are other, less obvious issues stymieing developers. Monthly operating costs for developers have risen due to rising insurance rates, which have sparked a crisis across the state, particularly for those living in wooded areas vulnerable to wildfires. Some homeowners’ insurance policies have even been canceled. Developers also reported that, on top of the insurance rates, it is difficult to connect projects to utilities, with some waiting months for Pacific Gas & Electric to connect them.
According to Ray Bramson, chief operating officer of Destination: Home, an advocacy group for affordable housing, developers are increasingly being forced to look beyond traditional funding sources.
Is it possible to resolve the issue? Developers and others involved in construction have said interest rates must fall — and city officials have said they are looking into a variety of different levers to help ease the situation. However, the possibilities are extremely limited.
Even if San Jose waived all of its project-initiation fees, the results would be minimal, according to this year’s report. This could also have an impact on transportation and park infrastructure, which rely on this funding source. Klein stated that they are looking into other options, such as reviewing construction-defect laws.
But a change to the California Environmental Quality Act, which critics have long blamed for delaying housing projects, would make the biggest difference, she said.
“If we could get rid of CEQA or substantially change CEQA, that would save a whole lot of money and a whole lot of legal fees,” Klein said.
