The lack of affordable housing, an ongoing crisis in the U.S., is exacerbated by regulations imposed by local, regional, state and federal governments that add to the cost of development. These regulations account for an average of 40.6% of apartment development costs, according to new research by the National Association of Home Builders (NAHB) and the National Multifamily Housing Council (NMHC).
The combination of increased land, labor and materials costs along with regulatory costs makes some projects financially unviable, according to the study. Among the regulations faced by apartment developers are zoning requirements, building codes, impact fees, permitting requirements, design standards, public land requirements and federal Occupational Safety and Health Administration (OSHA) regulations as well as other labor requirements. The researchers acknowledge that while smart regulations, particularly those related to the health and safety of workers, are important, some other regulations such as those relating to design standards are less necessary and contribute to higher costs.
Breaking down regulatory costs
Within the 40.6% of additional cost to multifamily developers, the largest average regulatory cost (11.1%) comes from changes to building codes over the past decade. While state and local governments adopt and enforce building codes, the federal government, policy groups, industry groups and even individual companies advocate for code changes often without regard for their impact on affordability. For example, many jurisdictions impose stringent energy codes that can increase development costs.
The second highest cost (8.5%) comes from fees imposed when site work begins, such as impact fees and utility fees. Nearly all (98% of respondents) said they pay these fees for a typical project.
The third highest percentage of added costs (5.4%) comes from mandates for out-of-the-ordinary development requirements such as energy efficient upgrades or special façade requirements.
Most developers (93.9%) said they needed to comply with OSHA and other labor-related regulations, which represent 2.7% of total development costs. While most of those regulations are important for the safety of workers and the public, researchers found that some are duplicative or unnecessary.
Another cost that hits most multifamily developers (93.9%) is the need to dedicate resources for rezoning to allow multifamily construction. Those costs average 3.4% of the total development cost.
Approximately half of developers (51%) have been required to maintain some portion of their development site unbuilt or dedicated for government use. The revenue from that portion of the land which is undevelopable must be absorbed or made up in other ways and averages 4.7% of total development costs when those requirements are in place.
Even if no other fees were charged by regulatory agencies, the pure financial cost of delays that occur because of complying with regulations averages 0.5% of toral multifamily development costs.
Affordability mandates, NIMBYism and multifamily development
The survey of 49 developers across the U.S. found that many encountered regulatory issues and public opposition to projects that caused them to be dropped or to be more costly. Most (74.5%) developers said they faced “Not In My Backyard” opposition to proposed development. Addressing those concerns adds an average of 5.6% to total development costs and delays projects by an average of 7.4 months.
Inclusionary zoning, which requires developers to set aside a specific number of apartments at below-market rent for low-to-moderate income households, actually resulted in developers raising the market-rate rents an estimated 7.6% to cover the cost of the below-market rentals. Even though inclusionary zoning often comes with an incentive to developers such as the ability to increase density, the financial benefit of the incentive is rarely enough to cover the cost of the below-market rentals.
The researchers found that 43.8% of developers said their typical project was in a jurisdiction with inclusionary zoning. Nearly half (47.9%) of developers said they avoid building in a jurisdiction with inclusionary zoning to avoid the additional costs and need to raise rents on other tenants. Most (87.5%) avoid developing multifamily housing in jurisdictions with rent control, which means affordable housing is not being built in areas where it may be most needed. Increased development costs naturally lead to higher rents and reduced affordability, according to the researchers, but they also constrain development. Financing for multifamily development depends on the ability of developers to prove to lenders that the rents they will charge will cover their costs and allow the loans to be repaid.