SF mayor convenes summit to address high affordable-housing building costs

By J.K. Dineen

A mix of escalating construction costs and changes to the federal tax code is hampering San Francisco’s ability to finance and build affordable housing. And the situation may only get worse even as the housing crisis forces thousands of families to flee to less-expensive cities.

That was the message from city housing officials Monday at a special “cost summit” convened by Mayor Mark Farrell. The group — about 50 nonprofit developers, architects, labor leaders and contractors — was asked to spend the next two months coming up with solutions for tackling the city’s spiraling housing construction costs.

Affordable projects in San Francisco now cost an average of $750,000 per unit, 17 percent more than the average of $627,000 just two years ago, said Kate Hartley, who heads the Mayor’s Office of Housing and Community Development. Between 2014 and 2017, the typical affordable housing project had a funding gap — the amount not covered by bonds, state money or tax credits — of about $235,000 per unit. That number is now $342,000 per unit.

The jump in costs has sent both market-rate and affordable builders — along with city housing officials — scrambling to find other funding sources and redesign projects to save money.

“Every project that comes in is coming in at 10 or 15 or 20 percent more than originally budgeted for,” Hartley said.

While construction costs have been ratcheting up annually since the recovery kicked in in 2012, the corporate tax changes passed by Congress last year are also hampering the financing of affordable housing, Hartley said. The reduction of the corporate tax rate from 35 to 21 percent means that there are fewer companies looking to buy Low-Income Housing Tax Credits — an $8.3 billion program that is the biggest source of affordable-housing construction financing. A lower tax rate means fewer corporations are competing for the credits, which reduces the amount that affordable developers can sell them for.

Hartley said the weakening in the tax-credit market is costing San Francisco about $50,000 a unit in equity — money the city has to make up — and has contributed to delays in the start of several affordable-housing projects, including Mission District projects like 1296 Shotwell and 490 South Van Ness.

“The pool of investors has shrunk considerably,” she said.

Farrell said the group’s objective is to “tackle the unprecedented construction costs that threaten the city’s affordable-housing production.”

He asked the summit attendees to join one of three working groups that will explore how housing development could be more cost-effective. One committee will look at labor costs and workforce development; one will study how government-regulation reform could reduce the time and price of building; and a third will look at how design and materials could reduce the price of development.

Farrell directed the working groups to “find real, actionable solutions to the affordability problems that are causing gridlock in our housing production.”

“We cannot provide affordable homes for our families if we cannot afford to build these homes to begin with,” Farrell said. “Our teachers, janitors, nurses and other working-class residents cannot wait forever for the city to find ways to build homes quicker and cheaper.”

The cost of construction — together with San Francisco’s highest-in-the country affordable-housing requirements — is also stalling market-rate developments. That means less money for affordable projects because much of the local money San Francisco spends on below-market-rate units comes from fees paid by market-rate developers.

“This is a very challenging cost environment for construction in all sectors, and we understand that it feels particularly difficult when looking at affordable housing,” said Kathryn Cahill, CEO of Cahill Contractors.

Affordable developer Sam Moss of Mission Housing said the inability to bring costs under control could mean that the city might get a smaller percentage of the $4 billion in affordable-housing bond money that will be on the state ballot in the fall.

In 2016, the California Debt Limit Allocation Committee, which administers the tax-exempt bond program, concluded that more affordable housing could be built in other parts of the state because San Francisco’s costs were so high.

“We need to figure out how we are going to fix this — the threat of the bond money not coming here is very real,” Moss said. “We should all be extremely worried because that would be a self-inflicted wound.”

Fernando Marti, co-director of the Council of Community Housing Organizations, said affordable buildings struggle to compete in a marketplace where most general contractors and subcontractors are busy building luxury high-rises and office towers. He attributed the rise in construction costs to the fact that more and more affordable buildings are mid-rise towers rather than five-story, wood-frame buildings.

“Up until four years ago, it was rare to see a city-funded affordable project be anything but wood-frame” he said. “It’s a new world.”

Rick Williams, a partner with Van Meter Williams Pollack Architecture, said he thinks a concerted effort can reduce costs by 10 percent, possibly more.

“Everybody is starting to see projects put on hold and are starting to realize that these costs can’t keep going up forever,” he said. “Nobody wants us to go into another recession because construction costs are so high and everyone stops building. We have to be very careful and work very hard to solve this.”

Marti said the fact that the mayor’s office is leading the cost-control initiative is promising.

“It’s not a new conversation, but it’s being elevated in a way I haven’t seen before,” he said.

This article was originally published in San Francisco Chronicle.