Construction Costs Keep Housing Supply Low

The high cost of construction is exacerbating the housing crisis in California and other markets where there is a housing shortage. Last year, construction costs increased more than 5% in Los Angeles alone, and this year, many expect costs to continue to increase sharply as trade tensions rise. These costs are having a significant impact on new construction across asset classes, and particularly on multifamily and housing product.

“Rising construction costs are certainly curtailing multifamily development and keeping supply low in many markets,” Richard Lara, president and CEO of RAAM Construction, tells GlobeSt.com. “This is exacerbating the housing shortage in markets like California, where affordability continues to drop, increasing the need for workforce and affordable housing development even more.”

Of course, high construction costs aren’t the sole reason for the housing crisis, but they are certainly part of the equation. “Add in the regulations that developers face in this state, along with NIMBYism, and there are even more headwinds against development of much-needed affordable housing,” says Lara.

RAAM focuses on affordable housing development, and is working with developers to find solutions to high costs. Affordable housing in particular comes with a unique set of challenges. “This is a primary area of focus for our firm – we specialize in affordable multifamily construction, which has its own set of unique complexities to navigate,” says Lara. “As costs rise, affordable multifamily developers must continually re-justify projects and re-work budgets, which means that workforce and affordable housing projects are not being completed at a pace that can keep up with demand.”

In general, Lara recommends pre-construction planning to curb construction costs, but for affordable housing, there are other options as well. “Fortunately, tax credits and legislation favoring affordable housing development are incentivizing developers to build this product type for some of our most vulnerable residents,” says Lara. “And there is hope that the new Opportunity Zone legislation will also prime the pump in areas of the country that are in desperate need of revitalization, particularly where housing is concerned.”

In addition to ground-up construction, redevelopment and adaptive reuse are other ways to save on construction costs. “Redevelopment and adaptive reuse are two other strategies that can offset construction costs,” says Lara. “Often, materials can be repurposed, and there may be certain tax breaks for substantially improving an existing property. If the project is a historic preservation, like many of the projects we work on, tax incentives may also apply.”