Presented to City of San Jose
October 26, 2023
Affordable Housing Development Cost
Study
Cost Study Objectives / Overview |
Provide annual update to study completed in 2022.
Evaluate cost of developing affordable housing in
San Jose through review of all major development
cost components. Identify trends/factors that
contribute to high costs.
Compare to other cities with similar construction
typology and identify cost variances to San Jose
projects and specific cost drivers.
Costs and other project data are obtained from tax
credit applications for projects that received tax
credit award since last study was completed.
2 Affordable Housing Cost Study Objectives / Overview
2350 S. Bascom, San Jose, CA
Alum Rock Multifamily, San Jose, CA
Cost Study Methodology |
Analyzed projects that received tax credit awa rds in first round of 2022 through first round of 2023
Included 8 projects located in City of San Jose totaling 987 units Included 21 projects with a similar construction typology located outside of City totaling 2,929 units
Affordable Housing Cost Study Methodology
422 (43%)
200 (57%) 276 (61%)
503 (32%) 390 (72%)
294 (30%)
543 (34%)271 (27%)
151 (43%)
179 (39%)
534 (34%)
153 (28%)
0 200
400
600
800
1,000
1,200
1,400
1,600
1,800
San Jose Santa Clara County Alameda Co unty Los Angeles County San Francisco County
Projects by Location and Housing Type
Large Family Special Needs Non-Targeted
2 Projects
Housing Units
8 Projects
3 Projects
11 Projects
5 Projects
3 Current Market Conditions |
25% increase in construction cost bid index since start of 2021. Interest rates have doubled over past 12 months with construction interest rates hovering above 8.00%. Rates have not only increased due to increases in underlying Secured Overnight Financing Rate (“SOFR”) benchmark, but have also increased due to increases in required spread to SOFR.
Per Terner Center report and L.A. Times article, affordable housing project costs in Bay Area exceed project costs in other areas of State with some projects in Bay Area costing over $1M per unit.
TBD Construction Bid Index
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Oct-22 Dec-22 Feb-23 Apr-23 Jun-23 Aug-23
SOFR Rate Over Prior 12 Months
0 50
100
150
200
250
300
350
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
2015
Q1
2016
Q1
2017
Q1
2018
Q1
2019
Q1
2020
Q1
2021
Q1
2022
Q1
2023
Q1
4 Study Findings |
Study Findings
Prior study included projects awarded tax credits from December 2019 through December 2021.
Shift in San Jose project housing types from prior study with greater proportion of Large Family projects and lower proportion of Special Needs, Non-Targeted, and Senior projects. Building height for San Jose projects decreased to average of 6 stories from prior average of 7 stories.
Average unit sizes for San Jose projects increased due to higher proportion of Large Family projects, which are required to provide at least 25% 3-bedroom or larger units.
Housing Type Number of
Projects
Number of
Units % of Total Number of
Projects
Number of
Units % of Total
Special Needs 3 294 30% 9 795 45%
Large Family 4 422 43% 0 0 0%
Non-Targeted 1 271 27% 5 655 37%
Seniors 0 0 0% 1 301 17%
Total 8 987 100% 15 1,751 100%
Avg. Building Height 6 7
Current Study 2022 Study
5 Study Findings |
Study Findings
Total development costs per unit increased
by approximately 13% from 2021 to 2022
and 24% from 2022 to 2023.
Cost increase is primarily due to larger
units in current study, which averaged
1,171 SF as compared to 962 SF in prior
study.
Higher costs due to larger average unit
size was partially offset by lower number
of Special Needs projects, which generally
have higher costs.
5 out of 8 San Jose projects included 50%
or more Extremely Low-Income (“ELI”)
units as compared to just 3 out of 21
projects in other cities.
Projects with higher percentage of ELI
units generally have higher development
costs.
Year
Number of
Projects
Average
Building
Height
Wtd Avg TDC
per Unit
% Chan ge
Prior Year
Cost per
SF
2019 1 8 $602,400 NA NA
2020 7 5 $635,600 6% $809
2021 7 8 $672,600 6% $677
2022 6 6 $757,900 13% $703
2023 2 6 $938,700 24% $735
San Jose Projects Total Development Costs per Unit by Year YOY %
Change NA 6% 6% 13% 24%
$602,400 $635,600 $672,600
$757,900
$938,700
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
2019 2020 2021 2022 2023
6 *Costs above are shown by year of application submission. Current study includes projects shown in year 2022 and 2023.
Study Findings |
San Jose projects average per unit costs exceed average per unit cost of projects located in other cities.
• Costs of San Jose projects average $811,000 per unit compared to $658,800 per unit for other city projects, a 23% difference.
• Only costs of San Francisco projects, which top $1M per unit, exceed costs of San Jose projects.
• Cost of Special Needs projects in San Jose average 35% more than costs for comparable projects in other cities.
$811,700
$875,700
$925,600
$588,600
$658,800
$727,000
$683,600
$553,700
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
All Projects Large Family Special Needs Non-Targeted
San Jose Projects Other City Projects
+23% +20% +35% +6%
7 Cost Drivers |
Unit Sizes
Average unit size for San Jose projects is larger than average unit size for projects in other cities. Average unit size for Special Needs projects in San Jose are notably larger than comparable average unit size in other cities.
Housing Type San Jose Projects
Average Unit Size
Other City Projects
Average Unit Size % Difference
Large Family 1,018 1,187 -17%
Special Needs 1,293 974 25%
Non-Targeted 1,275 1,123 12%
All Projects 1,171 1,125 4%
Tamien Station
135 Units
Special Needs Housing Type
52% of Units are 2+ Bedrooms
Alum Rock
60 Units
Special Needs Housing Type
50% of Units are 2+ Bedrooms
The Charles
99 Units
Special Needs Housing Type
51% of Units are 2+ Bedrooms
8 Cost Drivers |
Total Development Cost per Square Foot
San Jose projects generally cost more per square foot than projects in other cities. The City of Burbank project is an outlier with acquisition costs averaging approximately $95,000 per unit and developer fees averaging approximately $115,000 per unit. $323
$450 $473
$547 $580 $596 $618
$693
$893 $935
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
Total Development Cost PSF
BurbankSan
FranciscoSan JoseSanta
ClaraHaywardLos
Angeles
Santa
MonicaFremontAlhambraGlendaleCity
Los
Angeles
San
Francisco
Santa
Clara
Santa
ClaraAlamedaLos
Angeles
Los
AngelesAlamedaLos
Angeles
Los
AngelesCounty
1582141241Projects
14854398735117651057279525340Total
Units
8601,1391,1711,0109071,1059561,1761,1961,361Average
Unit Size
9 Cost per Square Foot by Cost Component
Construction hard costs are approximately 17% higher in San Jose than other jurisdictions. Permits and third-party costs are approximately 18% higher in San Jose than other jurisdictions. Financing costs, which are driven by construction costs are approximately 18% higher in San Jose than other jurisdictions.
Overall, San Jose Projects have a 15% higher average cost per square foot than the average of all other city projects.
Acquisition
Costs
Residential
Hard Costs A&E
Permits/Third-
Party Costs
Financing
Costs Reserves
Developer
Fees
Soft Cost
Contingency
Total Develo-
pment Cost
San Jose $36 $479 $17 $35 $63 $6 $53 $4 $693
Santa Clara County $49 $402 $13 $50 $51 $7 $44 $3 $618
Alameda County $34 $330 $8 $37 $36 $5 $60 $3 $513
Los Angeles County $47 $302 $13 $24 $51 $4 $49 $4 $494
San Francisco County $4 $728 $27 $21 $70 $10 $28 $6 $893 Weighted Average $37 $397 $15 $29 $52 $6 $46 $4 $586
Variance $ Amount -$2 $82 $2 $6 $11 $1 $7 $0 $107
Variance % -5% 17% 13% 18% 18% 8% 13% 0% 15%
Cost Drivers | 10
Cost Drivers |
Impact of Projects Serving Extremely Low-Income Populations on Overall Costs Extremely Low-Income ("ELI") households ar e defined as those earning no more than 30% of Area Median Income (“AMI”).
5 out of 8 projects comprising 54% of all units in San Jose projects had 50% or more of their units set-aside for ELI households (“ELI Buildings”).
In contrast, only about 8% of units in projects in other cities are located within ELI Buildings. Development costs for ELI Buildings are genera lly higher than costs for buildings targeting higher AMI levels due to need for increased subsidies, amenities and office space, higher operating reserves, and greater support services.
Even after accounting for differences in average unit size, costs for San Jose ELI Buildings still surpass cost of ELI Buildings in other cities.
$919,800
$811,700
$667,000 $658,783
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
ELI Buildings All Buildings
San Jose Projects Other City Projects
11 Cost Drivers |
Labor Costs
Labor costs typically comprise 55-60% of total construction costs. According to TBD Consultants, San Jose labor costs are on average 2% higher than Berkeley/Oakland labor costs and 1% higher than San Mateo labor costs. Prevailing wage is often required by cities as condition of funding and may result in increase of 10%-20% (or more) in construction costs.
San Jose projects that reported prevailing wage in their TCAC applications attributed 16% of construction costs to prevailing wage.
Prevailing wage is determined by California Department of Industrial Relations by County and is updated twice per year.
Project
Total
Construction
Costs
Prevailing
Wage Cost
% Prevailing
Wage of Total
Dry Creek Crossing $41.5M $6.1M 15%
777 West San Carlos $99.8M $12.1M 12%
Tamien Station Affordable $92.7M $20.0M 22%
Total $234.0M $38.1M 16%
San Jose Projects Prevailing Wage
12 Cost Drivers |
Impact Fees
San Jose project impact fees averaged $12,10 0 per unit in prior study and $19,900 per unit in current study. This average impact fee amount is higher than other cities, some of which provide impact fee waivers or exemptions for affordable housing. San Francisco and Los Angeles projects were assessed impact fees that equated to 3% and 16% respectively of impact fee amounts for compara ble market rate projects in these cities. In comparison San Jose projects were assessed impact fees equal to 25% of impact fee amounts for comparable market rate projects.
$19,900
$27,000
$35,200
$7,400
$2,400
$15,400
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
San Jose
Projects
Alameda Other Santa
Clara
Los
Angeles
San
Francisco
All Other
City
Projects
$19,900
$5,100 $2,400
$78,578
$31,575
$95,443
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
San Jose Projects City of Los Angeles San Francisco
Affordable Project Market Rate Project
Impact Fees per Unit
Affordable Housing Impact Fees per Unit
Comparison to Market Rate Impact Fees
13 Cost Drivers |
Affordable housing projects require multiple layers of funding. • San Jose projects averaged approximately 6 f unding sources with 2 projects requiring 8 funding sources, while projects in other cities averaged just under 5 funding sources. • More funding sources may cause delays, which may lead to increasing development costs. City subsidies in San Jose averaged $84,500 per u nit, increase from prior study subsidy amount of $74,000 per unit. Projects in other cities averaged $72,800 per unit in local subsidies. Projects comprising 60% of units received City of San Jose funding, where as projects comprising 50% of units received local funding in other cities, indicating higher reliance on local funding in San Jose.
Funding Sources
14 Affordable Housing vs. Market Rate Housing |
Development costs for affordable housing and market rate housing were compared on per square foot basis to adjust for differences in unit sizes. Market rate development costs for Type III construction projects were analyzed to be consistent with construction types for affordable projects reviewed in this study. Total development costs for San Jose affordable projects exceed estimated total development costs for market rate projects by approximately $85 per gross square foot or approximately 14%.
This represents increase to prior study di fferential of $51 per gross square foot or approximately 8%.
Affordable Housing vs. Market Rate Housing
15 Study Findings Summary |
High inflation and interest rates have resulted in significant increase in affordable housing costs since prior study.
Affordable housing projects cost more to develop in City of San Jose than most other cities evaluated in this study.
City prioritizes development of ELI units with 40% of most recent Notice of Funding Availability (“NOFA”) allocated to ELI units. ELI units have higher development costs and operating expenses.
San Jose affordable housing projects require more funding sources, which may result in higher soft costs.
Impact fees are higher in City of San Jose than other large cities. Prevailing wage is more common in affordable housing projects than market rate h o u s i n gp r o j e c t sa n dm a yr e s u l ti ni n c r ease of 10% - 20% (or more) in construction costs.
16