Time Delays And Increasing Building Costs Limit Multifamily Production

San Diego residential developers face a variety of challenges driving up building costs and rents, according to Sudberry Properties SVP Marco Sessa, who is among local developers presenting at Bisnow's State of San Diego’s Multifamily Market event Oct. 19.

“It takes years to get approvals (in areas outside of Downtown),” he says, pointing out time is money. Meanwhile, developers’ equity used to buy the land is tied up, and interest has to be paid to carry the loan. Pictured are Marco, Ron Grant of Alta Co and Sudberry chairman Tom Sudberry during the 2016 Arbor Day tree-planting event at Civita.

“It takes so long and is so expensive to get a project out of the ground, we cannot produce enough units to meet pent-up demand,” Marco tells Bisnow. “Special interest groups that have influence over the building industry, including community activists, environmental groups and labor, have prevented proposals to streamline regulations from ever seeing the light of day. We’ve had a deficit for over a decade now, and unless things change, we won’t be able to meet the housing needs of people in this county."

Costs due to time delays are compounded by the costs involved in meeting increasingly stringent state environmental quality standards for greenhouse gas emissions and water quality, as well as rising construction costs. Marco says material and labor costs continue to rise, but labor costs have risen faster and more aggressively than material costs, due to both a shortage in skilled labor and a new state law that changed the way workers can be paid.

He says fewer young people are choosing a vocation in construction than in the past, so as older workers retire, there are not enough younger workers to replace them. Additionally, the state legislature adopted a law in 2015 that eliminated the ability to pay labor on a “piecework” basis. Marco says the law was intended to ensure agricultural workers an hourly wage, but ultimately was applied to construction workers, too. Pictured above is the leasing office at 306-unit Circa 37, the first multifamily project at Civita.

Contractors once paid subcontractors by piecework, which motivated them to work faster to earn more per hour, he says. It also benefited contractors by getting jobs completed quicker and eliminated paperwork involved in tracking and documenting worker hours, which is now required. Meeting requirements of this new law adds 10% to 20% to construction costs, Marco says.

Most community-specific plans need to be updated to allow higher density, he says. Additionally, these plan updates should allow developers opportunities to process their projects using a ministerial process. Pictured is Sudberry's proposed 260-unit apartment project at Carroll Canyon on Scripps Ranch.

When faced with challenges, humans will seek solutions, Marco says, predicting as construction costs continue to rise, builders will use more modular building components produced in factories, and automation technologies, including robotics and 3D printing, will replace workers.

Keeping rents affordable for middle-income residents is a “chicken-and-egg” challenge, he says—projects need to achieve a high price point to get built. “There’s nothing in between luxury and affordable tax-credit projects, because it just doesn’t pencil.” But Marco says people are willing to pay more for housing to live near the beach, and San Diego continues to create more jobs to make that possible.

Above is Circa 37's pool. Sudberry is a long-term investor/owner and develops projects with a full range of amenities.

Sudberry recently completed the 612-unit West Park at Civita (pictured), the second apartment project to be built in this Mission Valley master planned community. Completed in 2012, the 306-unit Circa 37 at Civita was the first project. Another 400-plus units are planned in two buildings on a five-acre site. This project, which includes nearly 20k SF of neighborhood retail services, is in the design phase and expected to break ground next year, with completion 18 months later.

Sudberry is in the entitlement phase on a 260-unit apartment project in Carroll Canyon, just off the I-15, on Scripps Ranch and overseeing development of a 400-acre master planned community, called El Corazon (the heart, in Spanish) for the City of Oceanside, which owns the land. Approximately 45 to 50 acres of the site, located between Rancho del Oro and El Camino Real in Oceanside, will include commercial and residential development, and the remaining land will be open space dedicated to community services and recreational uses, Marco says. The property has an existing senior center and 22 soccer fields. The city also has plans to build an aquatics center.

Pictured is Sudberry's proposed 268-unit residential mixed-used project at El Corazon.

Sudberry is in the planning stage for a 268-unit apartment project with 5k SF of retail on the site. The master plan also calls for a 300k SF shopping destination. This community is served by the Sprinter light-rail system that runs from Escondido to Oceanside, he says. Pictured are existing soccer fields at El Corazon.

Hear more from Marco and other local multifamily experts at our State of San Diego’s Multifamily Market event Oct. 19.