PAGE 1CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS City of San Jose
Residential Feasibility Analysis
October 2023
PAGE 2CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Residential Feasibility Analysis
Century Urban, LLC (“Century | Urban”) has been engaged by the City of San Jose (“Client”) to conduct certain residential feasibility analysis. Market information utilized in this presentation has been drawn from a variety of market participants and sources. Century | Urban make no representations or warranties, express or implied, as to the accuracy or completeness of any specific data point or information. Any opinions, assumptions, projections, or estimates contained herein are projections only and used for illustrative purposes. The information contained herein is based on market conditions at the time of the valuation and subject to change.
All of the information provided herein is considered confidential and is furnished solely for the purpose of review by Client in connection with the ongoing feasibility analysis. The information is not to be used for any other purpose or made available to any other person without the express written consent of Century | Urban.
© Century | Urban 2023
Agenda
1. General Findings 3
2. Prototypes 4
3. Type I Scenarios 5
4. Rent and Sales Price Assumptions 6
5. Total Hard and Soft Costs Assumptions 8
6. Residual Values Per Unit 11
7. Stakeholder Feedback 12
8. Appendix 13
PAGE 3CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Residential Feasibility Analysis – General Findings
Residential Feasibility Analysis - General Findings
• Relative to 2022 residential feasibility analysis findings, residential development economics are more challenged under current market conditions.
• Since 2022 study, construction costs, interest rates, and target returns have increased.
• Total estimated costs across the prototypes studied increased approximately 12-13% on average since prior study, completed approximately 18 months ago.
• Interest rates have doubled over past 12 months. Construction interest rates are hovering above 8.0%.
• Rental rates and sales price have also increased, but increase amounts are insufficient to offset increases in costs and target returns. • Challenged feasibility was reflected across residential prototypes analyzed and was also reflected in sensitivity analyses, which evaluated 5% changes in rental rates, condominium prices, and development costs.
PAGE 4CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Prototypes
Prototype 1 2 3 4 5
Rental/Sale Rental Rental Rental Sale Sale
Construction Type Type V Type III Type I Type V Type I
Height/Stories 5 7 22 5 22
Avg Unit Size Net SF 900 900 900 1,150 950
Efficiency 80% 80% 78% 80% 78%
Avg Unit Size Gross SF 1,125 1,125 1,154 1,438 1,218
Density/Acre 65 90 350 50 350
Parking Ratio 1.0 1.0 0.8 1.1 1.1
Parking SF Per Stall 400 400 400 400 400
Parking Type Above-
grade
Above-
grade
Below-
grade
Above-
grade
Below-
grade
Submarkets South &
East,
Central
Central,
West, North
Central,
West,
North,
Downtown
South &
East,
Central &
West, North
Downtown
PAGE 5CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Type I Scenarios
Type I Scenarios
Type Central West North Downtown
For Rent Type I
Market,
Waiver
Market,
Waiver,
Affordable
Market,
Waiver
Market,
Waiver
For Sale Type I NA NA NA
Market,
Waiver
Market Scenarios assume that all units are leased or sold at market rental rates/sale prices and all statutory inclusionary in-lieu fees and construction taxes are paid.
Waiver Scenarios assume that all units are leased or sold at market rental rates/sale prices, 100% of statutory inclusionary in-lieu fees are waived, and 50% of Building and Structure and Commercial/Residential/Mobile Home Park (CRMP) construction taxes are waived.
Affordable Scenarios assume that 95% of units are leased or sold at market rental rates/sale price, 5% of units are leased at 100% AMI, 100% of statutory inclusionary in-lieu fees are waived, and 50% of Building and Structure and Commercial/Residential/Mobile Home Park (CRMP) construction taxes are waived.
PAGE 6CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Apartment Rental Rate Assumptions
Rent Per SF/Month
South & East Central West North Downtown
Type V $3.42 $3.60 NA NA NA
Type III NA $3.60 $4.10 $3.40 NA
Type I NA $3.60 $4.10 $3.40 $3.87
Rent Per Unit/Month
South & East Central West North Downtown
Type V $3,078 $3,240 NA NA NA
Type III NA $3,240 $3,690 $3,060 NA
Type I NA $3,240 $3,690 $3,060 $3,483
PAGE 7CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Condominium Sale Price Assumptions
Average Sales Price PSF
South & East
Central &
West DowntownNorth
Type V $775 $725 $700 NA
Type I NA NA NA $775
Average Sales Price Per Unit
South & East
Central &
West DowntownNorth
Type V $891,250 $833,750 $805,000 NA
Type I NA NA NA $736,250
PAGE 8CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Total Hard and Soft Costs Assumptions
* Includes in-lieu affordable fees, construction taxes, parkland fees, planning and building fees, and school fees in addition to other fees.
Figures rounded to nearest $1,000. Averages shown for Market Scenarios only.
Prototype Costs Per Unit
Prototype Size Low-Rise Mid-Rise High-Rise Low-Rise High-Rise Rental/Sale Rental Rental Rental Sale Sale
Construction
Type Type V Type III Type I Type V Type I
Submarkets South & East,
Central
Central, West,
North
Central, West,
North,
Downtown
South & East,
Central &
West, North
Downtown,
Central,
West, North
Average Hard
Costs $563,000 $635,000 $766,000 $758,000 $885,000
Average
Municipal
Fees *
$73,000 $82,000 $82,000 $76,000 $60,000
Other Soft
Costs $130,000 $151,000 $190,000 $175,000 $218,000
Total Hard
and Soft Costs $765,000 $869,000 $1,038,000 $1,009,000 $1,163,000 PAGE 9CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Development Cost Comparison
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
2022 2023
Average Hard and Soft Costs per Unit - Rental Prototypes Hard Costs Soft Costs
Estimated average total hard and soft costs per unit for rental prototypes increased by approximately 12.6% over 18-month period between 2022 and 2023 studies.
26%
74%
26%
74%
PAGE 10CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Development Costs Over Time
$537,300 $549,100
$790,800
$890,600
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
2018 2019 2022 2023
Total Development Cost - Rental
Average Total Cost per Unit Excluding Land
Source of 2018 and 2019 data: Memoranda from Keyser Marston Associates to City of San Jose PAGE 11CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Residual Values Per Unit
Figures rounded to nearest $1,000.
Residual Values Per Unit - For Rent
Submarket South &
East Central West North Downtown
Type V ($322,000) ($343,000) NA NA NA
Type III NA ($435,000) ($364,000) ($430,000) NA
Type I NA ($614,000) ($542,000) ($607,000) ($569,000)
Type I - Waiver NA ($540,000) ($469,000) ($573,000) ($496,000) Type I - Waiver -
Affordable NA NA ($469,000) NA NA
Residual Values Per Unit - For Sale
Submarket South &
East
Central &
West North Downtown
Type V ($342,000) ($394,000) ($419,000) NA
Type I NA NA NA ($611,000)
Type I - Waiver NA NA NA ($569,000)
PAGE 12CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Stakeholder Feedback
At meetings coordinated by City staff, stakeholders such as developers, brokers, and other industry professionals provided feedback regarding feasibility analysis assumptions and findings.
Key Takeaways:
• With exception of comments regarding estimated development costs being higher than development costs observed by some participants in the meeting, stakeholder feedback generally suggested larger feasibility gaps than estimated in feasibility analysis. • Comments that would likely have more material negative impact on feasibility included:
• Target Return-on-Cost should be higher – 6.0%-6.5%
• Rents are too high by $0.20 to $0.80 per square foot per month • Operating expenses have increased substantially, especially insurance • Comments on costs varied and included that hard costs were too high, in the correct range, and too low • Stakeholders also noted that waiving impact fees would help feasibility, but would be insufficient to spur housing production. Several stakeholders suggested that waiving annual property taxes for a period of time would have more substantial beneficial effect.
PAGE 13CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Appendix
Appendix
PAGE 14CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS 2022 / 2023 Comparison
Average Prototype Change 2022 / 2023 – For Rent
Item 2022 2023 % Change % Effect on
Residual Value
Hard Cost PGSF $435 $484 11% -19%
Soft Costs Incl. City Fees PGSF $131 $153 17% -9%
City Fees PGSF $33 $38 14% -2%
Total Hard and Soft Costs PGSF $566 $636 12% -28%
Rent PNSF $3.58 $3.69 3% 6%
Target ROC 5.25% 5.75% 10% -11%
Residual Value Per Unit ($370,800) ($494,800) -33% -33% Average Prototype Change 2022 / 2023 – For Sale
Item 2022 2023 % Change % Effect on
Residual Value
Hard Cost PGSF - Sale $422 $469 11% -19%
Soft Costs Incl. City Fees PGSF $122 $142 16% -8%
City Fees PGSF $31 $33 8% -1%
Total Hard and Soft Costs PGSF $544 $611 12% -27%
Condo Price PNSF $682 $752 10% 13%
Residual Value Per Unit ($425,800) ($485,600) -14% -14% PAGE 15CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Residual Value Example
PAGE 16CITY OF SAN JOSE RESIDENTIAL FEASIBILITY ANALYSIS Construction Types
• Type V construction refers to a building type in which the interior and exterior structural materials of the building are permitted to be “combustible”. This means that wood may be used as a core structural material in the building’s design including for framing, walls, floors and roofs. Wood-framed construction is often used for single-family homes, as well as smaller apartment and retail buildings. Wood frame construction is often lower cost than other construction methods.
• Type III construction refers to a building in which exterior walls are “non-combustible” but other elements (framing, floors, ceilings) may be designed with combustible materials such as wood. Walls are typically constructed from concrete block, precast panels, or other non- combustible materials. This type of construction is generally used in larger apartment buildings, schools and other medium-sized commercial buildings. • Type I construction refers to a building in which all structural materials are non-combustible.
In a Type I building, walls, floors, and roofs are constructed with materials such as concrete and steel. This construction type is generally utilized with high-rise residential and commercial buildings and tends to be the most expensive of the three construction types.
Each construction type has multiple subtypes and requirements specified by building code, but in general, the lower the construction type number, the greater the fire-life-safety requirements.