Bay Area rents could soar further to justify more building
SAN JOSE >> Soaring construction costs could hobble efforts in San Jose and other Bay Area cities to speed development of high-density housing such as apartment towers, according to a foreboding assessment being circulated in the South Bay.
Even worse, while ordinary individuals already face dire financial obstacles when they buy or lease housing, residential rents likely would have to spiral even higher to render the vast majority of Bay Area apartment towers economically viable for developers, experts warned the San Jose City Council at a study session last week.
“This is a housing crisis and a housing catastrophe, but if I’m going to kick off a new project, rents have to go higher,” Drew Hudacek, chief investment officer for development firm Sares Regis, told the San Jose council’s study session last week.
Luxury apartment rents in San Jose now range from $3.25 to $3.75 a square foot, Hudacek estimated during his presentation to the council. However, he added, to justify new luxury apartment development based on current construction costs, rents would have to rise to $4.25 to $4.75 a square foot. That means renters would be forced to endure an eye-popping 25 percent increase in rents before most new residential towers could be built.
“We have more than 6,000 units that are fully entitled and ready to be built,” San Jose Mayor Sam Liccardo told this news organization following the study session. “But developers can’t get shovels in the ground because the development
“This is a housing crisis and a housing catastrophe, but if I’m going to kick off a new project, rents have to go higher.” — Drew Hudacek, chief investment officer for development firm Sares Regis
costs are scaring away the financing.”
The mayor indicated that he might seek City Council approval to slash the fees that San Jose charges developers for their projects.
“I don’t know that City Hall can do that much to change market forces, but at the very least,” Liccardo said, “we need to take a hard look at reducing our fees and reducing our red tape.”
Sharply rising costs for construction and labor have added a fresh complication in the market, developers and experts told the City Council study session.
“Construction costs have increased dramatically, especially in the last 18 months,” Don Peterson, senior managing director Northern California for Mill Creek Residential Trust, said during a presentation to the council.
Developers and industry experts say commercial construction costs are rising primarily due to more expensive materials such as lumber and rising labor costs.
According to Hudacek, construction costs are rising about 1 percent to 1.5 percent each month — which is far above the general rate of inflation, as measured by the consumer price index. Construction expenditures represent 60 percent to 75 percent of the total cost of developing a high-density residential project, Hudacek estimated.
These difficulties and obstacles in financing and project profitability have occurred at a time when the Bay Area economy overall — and Silicon Valley in particular — is booming. It’s unclear if, or when, the economy in the Bay Area might cool off.
“We never know when the perfect time is” to develop a project, Elizabeth Seifel, a principal executive with Seifel Consulting, told the study session.
San Jose officials should still support housing development as a priority, even in the face of uncertainty, Erik Schoennauer, a San Jose-based land-use and planning consultant, said Friday.
“The council should be bullish about housing,” he said. “Yes, the city has a jobs-first general plan. But you cannot achieve job growth without new housing. Employers want to be where there is an adequate supply of housing. And if you want expanded retail services, you need more customers going into that area.”