3 Challenges Multifamily Developers Face Before Breaking Ground

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LOS ANGELES—Affordable housing developers and investors face a myriad of obstacles when trying to build new projects even as the need for affordable housing grows stronger year after year. Namely, there are three specific obstacles developers must overcome before ground breaks, says Kitty Wallace, executive vice president with Colliers International.

“The majority of the costs goes towards labor,” she  tells GlobeSt.com. “Then there’s the friends and family entitlement and finally, increased material costs.”

Increased Labor Costs

A lack of labor stems from the last economic downturn when a lot of construction workers left the state of California and never came back.

“If you want to build new construction and don’t have the established relationships or contacts, it’s hard to find good, reliable contractors and sub-contractors,” says Wallace. “Of course with such a high demand for workers, they are able to charge higher prices for services rendered. These workers charge a lot for their services.”

Not in My Backyard

Builders jump through the appropriate hoops to get the requisite permits and regulatory paperwork in order to start building their multifamily projects. In some areas however, neighbors and business owners have adopted a “not in my backyard” mentality.

“There is a perception that building affordable multifamily units in a specific neighborhood is going to bring down the property values,” says Wallace. “As a matter of fact, a client of mine converted a motel into affordable housing units and it actually cleaned up the neighborhood. Subsidized housing, of course, is different from affordable housing with affordable housing appealing mostly to first responders and middle America.”

For example, when a college student graduates and get a job for $40,000, that young adult needs nearby housing and maybe a roommate. He/She is a perfect candidate for affordable housing, Wallace says.

“We simply need to build more multifamily housing. The more housing we have in supply, the lower prices will drop,” says Wallace.

Increased Material Costs

There is so much building and developments going on in California that there is always a shortage of building materials. China was typically the supplier of cheaper materials, but now with the US-China trade war, there are delays, tariffs and additional costs associated with the materials.

Wallace points out that even before the tariffs, material costs were rising due to high demand.

“If you’re in the hole and under water, you might as well build a luxury building instead of affordable housing,” states Wallace.

Build More Housing

Wallace firmly believes if there is more new construction, some of the older housing stock will naturally become available.

“No matter what level of cost of homes are built, more housing flooding the market will allow rents/mortgages to come down and more residents will have access to housing,”  she concludes.