Are Construction Costs Killing New Bay Area Housing?
Even with apartment rents near record highs, rising construction costs and city fees are slowing down housing development around the Bay Area. In San Francisco, 4,500 new units were completed in 2017, down 14 percent for the year. Completions are expected to fall further based on the pipeline.
Garrett Frakes, partner at brokerage Polaris Pacific, said the entire Bay Area is becoming unattractive for development.
“Capital will move to other markets. It’s very fluid. It doesn’t have to sit here in San Francisco or the Bay Area,” said Frakes. “With plenty of deals where a developer calls us, they’re looking at a parcel. It doesn’t pencil.”
Developers are grappling with construction costs that have risen by 10 percent a year by some estimates, largely in part because of a shortage of labor. San Francisco has the second-highest development costs for all sectors in the world at $330 per square foot, behind only New York, according to a study last year by Turner and Townsend, a construction consultant.
The price of a building one apartment in San Francisco has reached $700,000, including upwards of $100,000 per unit in fees.
Developer AGI Avant’s 299-unit rental tower at 1270 Mission St. was approved last year. It was put on hold as the developer waits for construction costs to come down.
“The hard costs for concrete, Type 1 highrise just aren’t feasible,” said Jesse Herzog, chief investment officer at AGI Avant. “But we structure these deals to have flexibility. There’s time.”
Herzog said the site’s proximity to transportation and jobs will make it a successful project eventually, but for now the company is waiting.
Trumark Urban, the developer behind the Pacific, Knox and Rowan condo projects, has sold all 237 units in the projects aside from one penthouse.
Trumark is still looking for more projects in the Bay Area but focusing on high-end places like Palo Alto rather than San Francisco.
“It’s a very challenging climate,” said Arden Hearing, managing director at Trumark Urban.
Trumark is no longer involved in two projects that it won approvals for: 109 condos at 1554 Market St. and 220 units at 1601 Mission St. Both sites are now controlled by different Chinese-backed developers.
Land prices dropping
Land prices have been falling as costs rise. A few years ago, deals were closing at over $200,000 per approved unit. Some recent sales are still hitting those numbers, but earlier this year, the 1601 Mission St. site sold for $28.5 million, or $129,545 per unit.
“The land market is the most volatile of all the product types in San Francisco. It can change on a dime,” said Kyle Kovac, a sales broker with Newmark Cornish & Carey. “You can double your money without swinging a hammer. Now, it might only be worth what you paid” compared to a few years ago.