The high cost of constructionis exacerbating the housing crisis in California and other marketswhere there is a housing shortage. Last year, construction costsincreased more than 5% in Los Angeles alone, and this year, manyexpect costs to continue to increase sharply as trade tensionsrise. These costs are having a significant impact on newconstruction across asset classes, and particularly on multifamilyand housing product.

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“Rising construction costs are certainly curtailing multifamilydevelopment and keeping supply low in many markets,”Richard Lara, president and CEO of RAAMConstruction, tells GlobeSt.com. “This is exacerbating thehousing shortage in markets like California, where affordabilitycontinues to drop, increasing the need for workforce and affordablehousing development even more.”

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

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

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

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

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.