“Time is not your friend when you’re a developer,” said Eric Tao of AGI. Inc., real estate development company.
Soaring construction costs, labor shortages and higher regulatory fees tend to increase +15% annually. When developers have to absorb those increased fees and costs over the life of a large residential real estate project, a life of 3-5 years, developers may be forced to “delay” construction in the middle of the project or to simply not start the project at all, even when having the required permits.
San Francisco is a prime example of languishing residential real estate projects. There are some 6,750 units currently under construction with another 1,000 units scheduled to start in 2019. Add these unit numbers to the already approved 15,000 non-started, “languishing” units and you can visualize the problem.
According to Carlo Shannon, the managing director of a Tishman Speyer project, “…we’re building a fraction of the amount of housing that’s needed (due to job growth in San Francisco and the entire Bay Area).”
The reason these projects remain non-started and/or interrupted is cost. Developers in San Francisco need to sell their units for a minimum of $1,4000/square foot for a wood-frame building and at least $1,800/square foot for a taller, steel-framed mid to high rise building. Figure it out…a one bedroom, 850 square/foot condominium in a wood-frame building would cost $+$1.12M in San Francisco. In fact, average price per square foot can range anywhere between $2,000 – $4,500/square feet depending upon the building location and floor height.
In a city where +80% of the population is currently priced out of the housing market, these numbers are a real stretch for both buyers and developers.
Save having the building “bought out” prior to breaking ground or continuing with constructions, many believe that residential real estate developments in San Francisco must be “entitled” developments. “Entitled” here means developments that include “community benefits” which, according to city statutes that can open the door to local and state tax exemptions, that require a minimum of 18%and 20% of the building’s units for a rental or condominium project respectively, must be offered below market rate to the public.
To get the project off the ground and/or to keep it going, some developers agree to even more affordable units than the above stated 18% and 20%. Other outfits, public and private, team up to buy already begun but now languishing developments. One such project in San Francisco on Folsom Street was acquired by a public-private partnership and turned into a 100% family affordable building complex.
All of this is a lot for developers to juggle. Added to this already complex mix of majority-interest underwriters such as the International Brotherhood of Electrical Workers which requires specifically mandated returns on investments and/or partners of these developments, it’s amazing any project in San Francisco gets built.
Bottom line…affordability is huge for buyers AND developers.