Housing Getting Too Costly to Build in San Jose
Pipeline ebbs as feasibility study shows 26% increase in building costs.
An exponential increase in the cost of building new housing in San Jose during the past year has made it unlikely that new market rate and affordable projects will break ground in the near future, according to a new report commissioned by the city.
According to the study, the cost of building a single unit of affordable housing has surged over the past year in San Jose from $758K to $939K, a 24% jump and a three-fold increase compared to the average annual increases over the past decade and a half, the San Jose Mercury News reported.
Building costs in the San Jose Metro are 26% higher than in San Francisco and Alameda County, the report said, attributing the surge to a shortage in the labor market and differences in wage structures, the report said.
The report looked the cost feasibility of five different properties across San Jose, with none of these projects penciling out.
The cost of building 5-story to 22-story market-rate multifamily projects anywhere in the city will result in losses of “hundreds of thousands of dollars” for potential developers, the study found.
Exacerbating these calculations are rents that have plateaued or, in some neighborhoods, declined across the region. The study found that even if rents increased by five percent while construction costs decreased by five percent, the outcome would be the same.
Nanci Klein, San Jose’s economic development director, told the newspaper that the study paints a bleak picture for development in San Jose.
“It’s worse than last year. Unless something crazy changes, we’re not going to get much development, housing or commercial,” Klein said, the Mercury News reported.
According to CoStar data, no market-rate multifamily projects broke ground during the first half of this year in Silicon Valley. In the last half of 2022, developers started construction on nearly 5,300 units by comparison.
Construction also is slowing down considerably in the East Bay, where construction began on about 672 apartments, condos or townhomes in H1 2023, a drop from the 1,170 starts reported in H2 2022.
In San Francisco and on the Peninsula, work started on about 229 multifamily units during the first half of this year, a steep drop from the 1,846 units that broke ground during the first six months of 2022.