Eye-watering construction costs exacerbate California’s chronic housing shortage – Pasadena Now

A welder works on the construction site of a housing project in San Francisco’s Mission neighborhood. Photo by Michael Macor, San Francisco Chronicle via AP Photo

It is no exaggeration to say that California’s most serious economic, social, and political problem is its chronic housing shortage, especially for low-income families.

The supply-demand gap, particularly in urban areas, drives up costs and slows the economy by discouraging investment in businesses that create jobs. It also drives employers and their employees to other states where they can afford housing. It creates the highest rate of functional poverty in the country and is the primary cause of California’s highest homelessness rate.

The state has pushed local governments to remove barriers to housing construction, setting a goal of 2.5 million new homes over the current eight-year planning cycle, or an average of more than 300,000 homes per year, “and no fewer than one million of those homes must meet the needs of lower-income households.”

At best, California’s private and public housing developers will meet a third of that goal, and the recent trend has been downward. The state budget notes that in 2023, residential permits are down 2.9% from 2022 to about 110,000 units allowed, and it predicts that single-family construction will likely increase this year but that multifamily construction is expected to shrink 5.5%, the largest annual decline since 2020.

The budget cites high interest rates, imposed by the Federal Reserve to combat inflation, as a major factor in the state’s stagnant housing picture. But inflation itself — the rising cost of building materials and workers — is also a problem, as is the tangle of bureaucracy that projects must navigate.

A project now underway in downtown Sacramento, just a few blocks from the Capitol, illustrates how high development costs are skewing supply. The dilapidated Sequoia Hotel, originally built in 1906, is being converted into 88 small housing units—1,600 square feet each—for the homeless, at a total cost of $50.1 million, with most of the money coming from the state. That’s nearly $600,000 per unit, more than enough to buy a single-family detached home in one of Sacramento’s middle-class neighborhoods, and nearly $4,000 per square foot.

Sacramento is certainly not an isolated example of the skyrocketing costs of building housing for low-income Californians.

A similar project in downtown San Francisco, which will convert a fire-damaged building into 35 affordable apartments, will cost $1 million per unit, the San Francisco Chronicle reported this week.

“Just five years ago, the cost of building affordable housing in San Francisco was only about $740,000 per unit, according to the Bay Area Council Economic Institute. But today, units cost $1 million or more, raising the question of what can be done to bring the cost down,” the Chronicle reported.

What is that actually?

Government projects, such as those in Sacramento and San Francisco, typically have the highest costs because they require a variety of mandates, such as union labor, and because they rely on a variety of funding sources.

Private projects that don’t have to meet these mandates can be built much more cheaply, especially if they consist of modules assembled in factories and then bolted together on site. Construction unions, however, fiercely oppose such innovations and flex their political muscle to minimize their use.

A new $50 million housing fund created by Apple and private philanthropists will only fund projects that meet strict cost limits: less than $550,000 for studios and less than $700,000 for larger units. That’s still a lot of money, but it’s a step in the right direction.

California will never solve its housing crisis unless it gets a lot more bang for its buck.

CalMatters.org is a nonprofit, nonpartisan media enterprise that explains California policy and politics.