Home Construction Falls 10% Across the Bay Area

Housing construction across the Bay Area fell last year after two years of steady growth. Blame the increased costs of borrowing, labor and building materials.

Permits in the five-county Bay Area fell 10 percent to 16,535 last year, from 18,457 in 2022, the San Jose Mercury News reported.

San Jose led the Bay Area in housing production, issuing permits for 3,104 units last year. It was followed by San Francisco with 3,055 permits and Santa Rosa with 1,708.

Alameda County led home construction last year, completing 5,586 units, most of them market-rate for households making above-moderate income. At the same time, Santa Clara County permitted more homes, which means construction could surpass Alameda County this year.

But smaller cities are lagging behind in their housing goals. Of 102 jurisdictions in the nine-county region, 40 issued fewer than 50 building permits, according to the newspaper.

Foster City, Albany, Sausalito and Hercules handed out fewer than 10 building permits, and they were for accessory dwelling units, or granny flats.

Multifamily developers are having the most trouble obtaining construction financing, driven in part by rising costs and stagnant rents. Meanwhile, construction of ADUs has remained steady over the last three years.

Developers say it could be years before construction rebounds.

“The Bay Area will recover,” Drew Hudacek, chief investment officer of developer Sares Regis, told the Mercury News. “But there will be quite a pause in the near term.”

The slowdown in building could worsen a region-wide housing shortage and slow the building of 440,000 new homes the state says the nine-county Bay Area needs by 2031. Of those, 180,000 are expected to be affordable to low-income and very-low-income households.

The region is a tenth of a way into that eight-year goal, but just 5 percent toward hitting its target.

The biggest hurdle for builders has long been the cities’ glacial approval process and pushback from not-in-my-backyard residents. But after a slew of state laws meant to topple those barriers, it’s the builders who have rolled up their blueprints.

The problem: costs to develop are rising, but rents mostly aren’t, according to the Mercury News. As a result, the values for apartment buildings are falling.

“The good news is, we’re delivering $500 million of apartments this year,” Hudacek told the newspaper. “The bad news is, it’s costing us $750 million to develop them.”

Sares Regis will complete 1,000 new units this year — all of them planned before the pandemic, when rents were climbing, interest rates were low and financing was plentiful.

Now money to subsidize affordable housing has been scant. Cities hitting their overall housing goals are falling behind when it comes to building more affordable housing, according to construction figures.

The nine-county region has more than 40,000 affordable units in the construction pipeline now stalled as they await financing, according to a recent report from Enterprise Community Partners and the Bay Area Housing Financing Authority.

Of the construction permits San Jose has issued in the last five years, 25 percent have been for affordable units. When compared to completed units, that number drops to 16 percent.

Affordable housing units in the Bay Area require an average subsidy of $286,000 per unit. Construction is most expensive in San Mateo County, where they can cost an average of $825,000 per unit.

“Even if you get it approved, it becomes a challenge for the developers just to secure the funding,” Elisa Orona, director of housing equity with the San Francisco Foundation, told the Mercury News.

It’s why housing advocates back the $20 billion regional bond that would get many of these projects off the ground. BAHFA is scheduled to vote June 26 on whether to put the bond measure on the November ballot.

— Dana Bartholomew