As costs keep rising, it’s becoming harder and harder for governments to subsidize projects like they’ve done in the past.
It’s a problem that isn’t going away: the so-called “affordable” housing we’re building in many cities—by which we mean publicly subsidized housing that’s dedicated to low- and moderate-income households—is so expensive to build that we’ll never be able to build enough of it to make a dent in the housing affordability problem.
The latest case in point is a new affordable housing development called Estrella Vista in Emeryville, California, (abutting Oakland and just across the bay from San Francisco). A non-profit housing developer just broke ground on a new mixed-use building, about three-quarters of a mile from a local BART transit station, which will include 84 new apartments. The project also houses about 7,000 square feet of retail space. The total cost: $64 million.
Assuming that 90 percent of the building is residential, that means that the cost per apartment is something approaching $700,000 per unit. While the complex provides many amenities for its residents (proximity to the BART station, a Zen garden, and sky deck), its inconceivable that we have enough resources in the public sector to build many such units.
Policymakers are beginning to realize this problem. As we wrote earlier this year, California Governor Jerry Brown made that point in his state budget. He’s said that he’s not putting any new state resources into subsidizing affordable housing until state and local governments figure out ways to bring the costs down. Last year, opposition from labor and environmental groups blocked the governor’s proposal to exempt affordable housing from some key regulatory requirements. Brown had offered $400 million in additional state funds for affordable housing if that proposal was adopted. Brown took that money off the table.
“We’ve got to bring down the cost structure of housing and not just find ways to subsidize it,” Brown said in is budget speech.
And the costs are substantial. In San Francisco, one of the largest all-affordable housing projects, 1950 Mission Street, clocks in at more than $600,000 per unit. That number isn’t getting any lower: new units in that city’s Candlestick Point development will cost nearly $825,000 each, according to recent press reports. Brown’s point is that at that cost per unit, it’s simply beyond the fiscal reach of California or any state to be able to afford to build housing for all of the rent-burdened households. And while the problem is extreme in San Francisco, it crops up elsewhere. In St. Paul, affordable housing—mostly one bedroom units—in a renovated downtown building cost $665,000 per unit.
More broadly, the case has been made that much publicly subsidized affordable housing costs much more to build than market rate housing. Private developers are able to build new multi-family housing at far lower costs. One local builder has constructed new one-bedroom apartments in Portland at cost of less than $100,000 a unit, albeit with fewer amenities and in less central locations than most publicly supported projects. In Portland, local private developer Rob Justus has proposed to build 300 apartments and sell them to the city for $100,000 each on a turn-key basis to be operated as affordable housing. Another possible cost savings measure: off-site construction. The University of California, Berkeley’s Terner Center has a report that explores the possibility for pre-fabricated, off-site construction to reduce construction costs.
Portland Mayor Wheeler voices the same concerns as California Governor Brown:
We’ve added a lot of programs to affordable housing that may be socially desirable. But when the goal is to create the maximum number of new doors, we have to reduce costs and get more supply on the market as quickly as possible.
In the Twin Cities, Myron Orfield has pointed out that the allocation of tax credits and the concentration of community development corporations in urban neighborhoods has tended to produce more housing in costly urban locations. Orfield also blames the high overhead costs of CDCs:
Central city development programs are inefficient, spending much more per unit of new affordable housing in the central cities than comparable housing costs in more affluent, opportunity-rich suburbs. Many of the leading developers working in the poorest parts of the region also pay their managers very high salaries. As a result, the funding system incentivizes higher cost projects in segregated neighborhoods over lower cost projects in integrated neighborhoods.
Perhaps the central problem of housing affordability is one of scale: the number of units that we’re able to provide is too small. That’s true whether we’re talking about Section 8 vouchers (that go to only about 1 in 5 eligible households), or through inclusionary zoning requirements (which provide only handfuls of units in most cities). The very high per-unit construction costs of affordable housing only make the problem more vexing: the pressure to make any project that gets constructed as distinctive, amenity-rich and environmentally friendly as possible, means that the limited number of public dollars end up building fewer units. And too few units—scale—is the real problem here.
The combination of very limited public funds for affordable housing, even in the most prosperous and liberal cities, and the tendency for publicly subsidized housing to be nearly as costly as new, market rate housing, is a recipe for failure. Ultimately, we’ve got to find ways to make housing (whether built by the public sector or the private sector) less expensive.
This article originally appeared on CityObservatory.