In the past few months, one of the challenges HAC has been working to address is financial feasibility. If you’re a Bay Area homebuilder, you know that since the pandemic, multifamily housing construction and feasibility haven’t exactly gone hand in hand. With recent hikes in interest rates, skyrocketing construction costs, and exorbitant impact fees, projects haven’t been able to receive financing because they simply don’t pencil out.
While there isn’t much we can do in regards to the high-interest rates or construction costs — San Francisco has the highest construction costs in the world — there are levers we can pull to improve feasibility and help jump-start housing production.
First and foremost, we need to reexamine “impact fees.” Impact fees are a number of payments imposed by local governments on new development as a way of generating funds for the expansion of public infrastructure needed to support new housing. These include public services like schools, affordable housing, public transit, and parks. As a general principle, I think this is smart and good public policy. Requiring homebuilders to invest in the cities they build in can help create more vibrant and sustainable communities. However, the data has shown that these fees have become so exorbitant that they actually disincentivize new development. As our region grapples with a severe housing shortage, discouraging housing construction is the last thing we should be doing. What’s more, if new housing isn’t getting built, none of that money is getting generated.
The good news is that there are signs cities are becoming more aware of the barriers impact fees create and are starting to adjust their requirements accordingly. San Francisco recently lowered all fees on multifamily housing projects as the city aims to spur more housing development. In the South Bay, Sunnyvale’s Housing Element was recently rejected by HCD as state officials explicitly stated that the city’s high fees are an impediment to new development.
These are encouraging signs. As state and local officials start to place a spotlight on impact fees, the goal should be to find the sweet spot that allows cities to reap the benefits of these investments in public services without making the fees so high that they become a barrier to building new housing.
And with all of that being said, impact fees are just one piece of the feasibility puzzle. We need to continue to make reforms to our approvals and entitlement process so that projects can go from the application stage to the building stage at a significantly quicker rate. It’s no secret that cities across the Bay Area — San Francisco in particular — have notoriously onerous entitlement and permitting processes. This years-long process creates additional costs for homebuilders, increasing the likelihood of infeasibility.
If we want more housing, local and state lawmakers need to continue to eliminate the bureaucracy and red tape that prevent our region and state from reaching its housing goals. When it comes to feasibility, we have a long way to go, but we’re headed in the right direction.