Written By: Joel Palmer, Op-Ed Writer
Almost one-third of the cost for the average multifamily development project is spent on complying with local, state and federal regulations. For about a quarter of apartment complex projects, the cost of regulations now accounts for more than 42 percent of the overall development cost.
This is according to a recently released report co-authored by the National Association of Home Builders (NAHB) and the National Multifamily Housing Council (NMHC).
The authors wrote that the report was not designed to argue against regulation, but rather to promote awareness of the high cost of regulation on multifamily development projects and how that potentially affects housing affordability.
“A substantial amount of regulation is well intentioned and some of it undoubtedly serves a worthwhile purpose,” read the report’s summary.“But regulation that exceeds 30 percent of a project’s development costs raises questions about how thoroughly governments are considering the consequences of their actions.
“When the cost of multifamily development rises, it unavoidably translates to higher rents and reduced affordability of rental housing. Multifamily developers cannot secure financing to build their projects unless they can demonstrate to lenders that the rents will be sufficient to cover costs and pay off the loans.”
And these costs are only going to increase.
For starters, the survey’s authors concede that the estimates in this report are understated, “as it was not possible to account for items like the effects of tariffs on building materials or the extent to which local juridictions may empower the citizens to oppose multifamily housing in their communities.”
Also, there are some mandates that have only recently taken effect, but will likely increase regulatory expenses going forward. One example cited in the report is the 2017 passage of OSHA’s Silica Rule, which requires employers to take steps to protect workers from exposure to respirable crystalline silica. Another example is that the 2018 versions of model international building codes are being adopted by local jurisdictions.
The survey showed that about 7.2 percent of a typical project cost today is additional expenses related to changes in building codes over the last 10 years. These added costs occur on about 98 percent of multifamily development projects.
Some of these code updates, according to the report, are less about safety and soundness and more about advancing “various policy objectives.” One area where this occurs is in energy efficiency requirements, such as complying with the International Energy Conservation Code (IECC).
“Energy efficiency is a worthwhile objective, but NMHC and NAHB have argued that the up-front cost needs to be kept within reasonable bounds,” read the report.
Ironically, another 5.7 percent of expenditures for a typical project is complying with affordability mandates. This occurs on about 30 percent of projects.
Affordability mandates are typically imposed by local jurisdictions looking to create new affordable housing. Developers either have to pay a fee to avoid these requirements or they have to lose money on some of the units being built in order to comply. Either way, this adds to development costs.
Higher regulatory costs are just one challenge facing multifamily developers. Land prices are escalating in several markets, and higher interest rates will only add to the cost of financing projects.
This all comes at a time when multifamily units are in greater need. A joint initiative by the The National Apartment Association and the NMHC estimates that 4.6 million new apartments will be needed in the U.S. by 2030. This is due to population growth, immigration and changing lifestyle preferences.
If the supply of apartments don’t meet this demand, not only will it increase rental costs, it will only add to the increasing demand for single-family homes. This potentially means escalating home values.
And if there is more pressure to help people buy homes because of a dearth of apartments, there could be a repeat of the early 2000s, when public policy initiatives combined with competition among lenders caused loosening underwriting standards.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.