Building a single unit of affordable housing in Sonoma County can now cost over $700,000

In Sonoma County, building a single affordable apartment can now cost over $700,000, an ever-growing price tag that’s making it even harder to put a dent in the region’s chronic housing shortage.

A range of development challenges are driving up that record-high amount, from the rising costs of land and materials during the pandemic to the drawn-out local approval process for many projects.

“With the escalation of construction costs, my presumption is that we need to prepare for those (per-unit) figures to go up,” said Efren Carrillo, vice president of residential development for Burbank Housing, the largest affordable housing developer in the county.

The costs are even higher in larger metropolitan areas, more than $1 million per unit for a half dozen apartment projects in San Francisco, Concord, Oakland and San Jose, the Los Angeles Times reported in June.

Affordable developers like Burbank reserve units for low- and middle-income residents at below-market rates, and typically rely on public subsidies to make projects financially viable. Market-rate developers, meanwhile, sometimes also include a percentage of cost-restricted units in their projects, often in exchange for zoning concessions or instead of paying fees for new affordable housing. In most cases, the cost of living in a unit deemed “affordable” is capped at 30% of a household’s income.

Even before the pandemic sent rents and home prices soaring, half of renters and nearly a third of homeowners in Sonoma County were spending over 30% of their earnings on housing, leaving less money for necessary expenses and making them “cost burdened,” according to researchers with Bay Area Equity Atlas.

If policymakers and developers fail to find ways to spur more affordable home building in the face of rising development costs and scarce public funding, thousands of local residents will likely continue paying too much for housing and remain stuck on yearslong wait lists for the few homes they can comfortably afford.

“The housing affordability crisis is undermining the California Dream for families across the state, and threatens our long-term growth and prosperity,” said Gov. Gavin Newsom last year in a statement introducing a new funding program for affordable housing.

Sky-high costs of materials, land and labor

In 2019, the average cost of building a unit of affordable housing in Sonoma County was just under $500,000, according to an analysis by the Bay Area Economic Institute. But as the pandemic has continued to upend the global economy, that per-unit cost can today reach between $650,000 and $750,000, according to Carrillo with Burbank Housing.

A main reason for the increase, Carrillo said, is the skyrocketing price of building materials due to supply chain issues and other inflationary pressures. For one Burbank project, 3575 Mendocino Ave. in Santa Rosa, that’s sent the estimated price tag for the second phase of construction on the 162-unit project up to $737,000 per unit.

“It forces developers to scramble to fill those financing gaps,” Carrillo said.

Sonoma County’s limited available land, which doubled in value during the past decade and has only become more expensive amid the pandemic real estate boom, presents another underlying challenge to building affordable housing.

To free up more land for development, local jurisdictions are increasingly looking to use public property for affordable homes. In west Santa Rosa, construction is underway on a project to redevelop an abandoned county government complex on College Avenue into 164 low-income apartments.

A state law passed in 2019 also requires government agencies to identify underused public lots for affordable housing. But the state has made slow progress offering up its own surplus property for development, according to a state auditor’s report.

Yet another challenge for affordable home building is the cost of labor, which has surged due to a shortage of construction workers. Unlike market-rate developers, many affordable developers are required to pay workers higher, union-scale wages to receive state and federal subsidies, furthering driving up construction expenses. Backers of such “prevailing wage” rules say the increased pay is key to supporting an essential workforce.

In response to the sky-high building costs, some developers have begun turning to prefabricated “modular” construction companies that assemble units offsite. Modular projects, such as a planned supportive housing site for homeless people in Rohnert Park, can save up to 20% in total project costs by reducing construction times and using materials more efficiently, according to a report by McKinsey and Company.

“We developers have to find ways to build less expensively because construction costs in California are out of control,” said Jack Gardner, president of the John Stewart Co., the affordable housing developer of an under-construction, 102-unit modular project in Oakland and a planned 162-unit development in Santa Rosa called The Cannery.

Slow approval process and neighborhood opposition

Developers have for decades blamed the byzantine local approval process for delays, driving up costs and even killing projects altogether.

Before breaking ground, projects must go through various government agencies in charge of regulating zoning and design standards, issuing building permits and assessing fees to help offset a development’s impact on infrastructure, schools and other public services — another expense developers say can be difficult to cover.

Proposed projects also are often subject to a public review process that allows neighbors to voice their opposition to new development. That can lead to costly planning changes in hopes of easing community concerns about parking or architectural design elements, for instance. It can also put pressure on public officials to vote against new affordable housing, even in cases where they may be bound to approve it by state regulations.

“It’s a problem because there's still a lot of folks in this community that are having a hard time with the realization that this community is changing,” said Cal Weeks, policy director for the Sonoma County nonprofit Generation Housing, which promotes affordable housing development.

Additionally, city and county planners are required to study a development’s impact on the environment under the California Environmental Quality Act. While proponents of the landmark law argue it’s essential for determining a project’s impact on everything from traffic and air quality to sewer infrastructure to wildlife and water resources, developers say it can lead to expensive, multi-year environmental reviews and legal appeals initiated by a small handful of people who oppose a specific development.

A report by the state’s Legislative Analyst’s Office, found CEQA appeals can delay projects an average of two and a half years.

In recent years, state lawmakers have approved controversial legislation aimed at speeding up affordable housing development by reducing local control over the approval process. One of those measures, Senate Bill 35, allows eligible projects with affordable units in jurisdictions behind on their state housing goals to bypass design and environmental reviews and receive approval in under a few months.

The overall impact of SB35, however, appears to be limited in the North Bay. In Santa Rosa, just three projects over the past five years have been approved using the law.

Lack of public funding

As construction and development costs rise, two of the main sources of public funding for affordable projects — federal low-income tax credits and state tax-exempt bonds — are in short supply. The subsidies, which transfer tax benefits to bondholders and investors in developments with low-income units, have become increasingly oversubscribed in recent years as developers have sought to build more affordable projects.

“We have a lot of great developers of affordable housing and affordable projects statewide, but we all compete with each other to get these scarce funding sources,” said Gardner, president of the developer behind the 162-unit Cannery project in Santa Rosa.

The long-delayed development near Railroad Square is set to finally break ground later this year, after receiving $57 million in low-interest loans in February from a new $1.75 billion state program to help finance projects that missed out on tax credit and tax-exempt bonds.

Even with new affordable housing investments by the state, experts and developers say more public and philanthropic money is likely needed to reach the county’s upcoming state-mandated housing goal of over 6,000 new low-income homes between 2023 and 2031 — double the amount of the current eight-year target.

At the local level, cities from Petaluma to Healdsburg are raising funds for affordable housing through hotel taxes, development fees and other sources. And Bay Area companies and nonprofits including Kaiser Permanente and St. Joseph Health have recently given millions in awards to affordable projects in Sonoma County

Michael Lane, state policy director with Bay Area think tank SPUR, is advocating for Newsom to increase the roughly $1 billion currently set aside for affordable housing in the $300 billion state budget for next year.

“The state is flush now with a surplus, and we’re hoping they can direct more funding going forward,” he said.

You can reach Staff Writer Ethan Varian at ethan.varian@pressdemocrat.com. On Twitter @ethanvarian