A question I have heard a lot lately is “why can’t developers build housing for the people who need it most instead of for the rich.” Let’s look at what a typical multi-family development project in a reasonably central part of San Francisco would cost to build (in a very simplified way). I’m assuming an 800 square foot apartment in a five story 100 unit wood-framed building over a concrete first story (very common in San Francisco):
Land cost per unit of housing: $120,000 (current average)
Construction cost per unit (hard costs), which could be up to 30% higher in an all-concrete building: $300×800 s.f.: $240,000 *1
Permits, city fees and professional services fees at 20% of $240,000, but this could easily be doubled on some projects: $48,000
Subsidy to build affordable BMR units (12% of total unit count) based on a $200,000 per unit subsidy x 12 divided by the remaining 88 units: $27,000 *2
Total cost so far: $431,000
Selling expenses (marketing, legal fees and real estate commissions) at 8%: $34,480
Total bare-bones cost per 800 square foot unit: $461,480
This is VERY SIMPLIFIED and does not include construction financing expenses, contingencies, or developer’s profit, among other things, and on projects that are difficult to get permitted the cost could skyrocket. Google around for sample proformas if you want to get a better idea of project costs.
You’re looking at nearly half a million dollars for an 800 square foot apartment, and that is not even including all the costs that would actually go into a project like this. This is not affordable at all when the median household income is $73,000 in San Francisco, which qualifies for a $310,000 mortgage (play with the numbers here). How could we bring this down?
A clearer entitlements process could bring down the $48,000 figure for permitting/fees/professional services significantly. Remember, this number could easily be $100,000 on some projects.
Finding another way to fund the BMR program would reduce the $27,000 subsidy, although arguably the BMR program would be unnecessary if market rate housing were cheaper.
- Lower real estate prices would mean construction costs would be lower. The cost of expensive San Francisco labor (construction workers have to deal with the high cost of living too) is a big part of that $300/SF figure and real estate cost also factors into the cost of storing materials and construction staging.
- An easier entitlements process would also mean that there would be more sites available for development, which would presumably drive the cost of land down.
1. This might even be a bit low now, costs are escalating quickly right now. Most of the construction cost goes into things like the structure, foundation and HVAC systems, elevators etc. not the finishes, so the construction cost per square foot is similar across different segments of the market.
2. The Mayor’s Office of Housing handles these sales, you can see what is for sale now here: http://sf-moh.org/index.aspx?page=299 Alternately, a developer can choose to pay a fee to the Mayor’s Office of Housing which will pay for affordable housing elsewhere in the city. These projects are typically built by a nonprofit like Bridge Housing or the Tenderloin Neighborhood Development Corporation.