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North Bay Construction: What is Driving Costs?

Author: Bonnie Durrance
September, 2017 Issue

If construction is the indicator of the economic health of a place, then the North Bay is booming. Just about everything is going up—value, cost, demand as well as effort to contain the impact of that demand. Business, if possible, is almost too good for people in the construction industry. There is such demand and so much work, that those in the industry are doing exceptionally well,  but, some, because of the rising costs, are losing out.
The North Bay is becoming polarized as the availability of middle- and lower-income housing indicates the social health of a community, and it’s becoming increasingly difficult—if not impossible—for young adults and the working class to build a life in the area they call home. In fact, the North Bay is becoming a place quite different from what it was at the turn of the 20th century, before the recession and housing crash.
Today, with rising costs many people, young and old, whose incomes are declining are being forced to move to distant, less expensive counties. Workers may commute from distant counties to jobs in Sonoma, Marin or Napa counties for a few dollars more an hour, after the cost of gas. Will the trend continue? Most people agree that prices are not going to come down. New, cheap land is not going to be discovered. Housing developers are not going to find a new, open road to profit. Workers are not going to suddenly find acres of “affordable housing” opening up, as did after World War II, when land and government assistance under Federal Housing Association was plentiful.
Times have changed. Here’s an overview of what’s happening in the North Bay—who’s winning, who’s losing as well as the creative solutions that are being applied to seemingly intractable problems.

Community first
Hugh Futrell, president of Hugh Futrell Corporation, has been in the business for 35 years and works with an eye and ear to the heart of a community. His work is mostly in Sonoma County, and is city-centered, he says, partly because he has expertise in urban core work and partly because people generally accept the importance of developing in the core area of Bay Area cities. His firm is diversified and includes lower income, market rate, rental and for-sale housing.

One current project will provide 107 apartments in downtown Santa Rosa. Another project will transform Santa Rosa’s Empire Building into a boutique 71-room hotel that will bring new life to the area. He hopes to begin construction on that soon. As for the rising costs, he is philosophical. “We have to remember that this is a very expensive part of the world to live in,” says Futrell.  It’s the younger people (people who are not homeowners, people contemplating starting young families, who are punished by an economy like ours), he explains, who often must move to other counties where they can afford to live and work, or commute back to their home county in Sonoma, Napa or Marin.

 “People who have stocks and money in the bank, and own a house, with its rising values, benefit from rising rents, rising sales prices, and sometimes even rising construction costs,” he says. “But the more marginalized people pay the cost and we end up with a bifurcated community, divided between those who have and those who don’t.”  This is not an entirely new condition, but as prices escalate, the separation grows between those who benefit and those who may be forced out.

Land, supply, materials and labor
What’s driving the escalation of prices? “Steel and concrete has gone up dramatically,” says Futrell. “And now wood-frame construction is also jumping dramatically, partly because of accelerating lumber costs.” Tariffs against China’s steel and Canada’s lumber factor heavily in here.

“The Department of Commerce announced in April this year that they were applying duties of 20 percent on Canadian lumber,” says Futrell. “So we’re seeing a 20 percent increase in Canadian Lumber. We’ve got punitive steel tariffs applied to Chinese steel. But the biggest impact on rising cost is not regulatory tariffs, but demand. In the Bay Area core and larger bay area, there is simply tremendous demand.” This is a good thing, if you have the land and the labor to fill the demand. Futrell works mostly in the City of Napa, so the challenges finding and acquiring undeveloped land is not an issue. For him, for everybody we talked to, the issue is the shortage of labor.

 “I’ve been at this for many years,” says Futrell, “and the number of qualified subcontractors is as small as it’s been in a generation.” The reasons for this are complex, but the trigger event, commonly accepted, was the recession, starting in 2000, when the housing market began to collapse. Builders and developers were left high and dry and the labor force had to look elsewhere, often back in Mexico, to find work to support their families. When the economy picked up, many did not come back. “There was economic growth going on in Mexico,” says Futrell, “and then we had the chilling effect of the Trump immigration policies.” The shortage of construction workers overall may be a reflection of yet another cultural change. “Part of it is demographics,” says Futrell. “There’s fewer young people willing to go into construction.”

He sees this decline not only among immigrants, but also among young nonimmigrants and second generation immigrants as well. He sees it partially having to do with a changing emphasis in educational programs. “If you’re an 18- or 19-year-old looking at the construction trades, you would have been influenced because you had a vocational education program in school that you liked, and trained for, but those programs have been reduced dramatically in schools,” he says. “Also, you would’ve been part of a family and a culture that valued working with your hands, and didn’t think that was inferior to white collar work. But now we have a culture that emphasizes college, white collar work, and not working with you hands as something that is desirable.”

Futrell also sees other less quantifiable cultural trends, such as a more dependent, sedentary, video-centered life-style that may play a role in students’ appetite for a vocation involving physical work. “Those who suggest you only must ‘pay people more’ are missing the point,” he says. “In the construction trades, people are paid more.” Futrell points out that someone in the trades (with overtime) working as a journeyman, electrician, or sheet metal worker can make  $100,000 a year or more. “It’s real money. Kids working on a skateboard at a pizza place could turn their lives around, if they had a desire to do so and were hooked into a network that led them to that decision.”

Additional costs
There are also an overwhelming amount of additional costs that impact construction costs. For a housing developer wanting to satisfy the needs of those who have to flee the county to find reasonable dwelling options, the picture is bleak. First, to find suitable land, you must consider wetland mitigation, environmental mitigation, salamander mitigation, fees and exaction (schools, sewer, water, parks, traffic and more), regulations, permits and mandatory features now required for a new house in Sonoma County.

What’s more, fire sprinklers, earthquake tie-downs, unnecessarily high hand rails, humidistats, motion detectors and more are all nice amenities, but drive costs up considerably making it nearly impossible for people to find affordable housing, says “Tux” Tuxhorn. For Tuxhorn, who’s been in the business for more than 40 years and has developed more than 25 residential projects in Sonoma County, the concept of affordable housing is incongruent with the regulations caused by government overreach. “To a certain degree, government has mandated building considerably better homes than the existing housing stock,” he says.

Today, Tuxhorn consults with banks, attorneys and developers about the issues that are faced in developing projects. He’s dismayed at the difficulties presented to anyone wanting to build a housing development in Sonoma County. According to Tuxhorn, it’s extremely difficult for a new builder to raise the cash needed to fund a development project, considering the requirements and high risk. There are numerous approvals, requiring architecture, engineering special studies and application fees, and the amount of fees, and ever-changing rules, including bank regulations. For example, after the 2007 financial crisis, builders were required to invest a great amount of capital and personal guarantees to obtain financing for a construction project. If the project fails, it is catastrophic to the builder. In addition, environmental rules also add dramatically to the cost of construction. Tuxhorn estimates the increase in mitigation costs for wetlands and salamanders have increased from $30,000 in 1989 to $8 million or more for an 80-acre parcel, located in southwest Santa Rosa.

Tuxhorn is concerned that the lack of housing drives the cost of living beyond what the younger generation can afford based on local employment opportunities and prohibits them from buying homes and starting families in Sonoma County. Two of his children have left the county for good. “Five, counting the grandkids,” he says. “It’s hard to fathom how we’re going to get people to stay here. And the latest economic forecast out of UCLA is that the cost of living isn’t going down, it’s only going up.”

The irony is that while this is bad news for the young, who leave for better opportunities and lower costs of living, and bad news for those who want to create new housing developments, he admits it’s great news for those who want to sell or increase value by remodeling. “Going into the construction profession isn’t bad,” says Tuxhorn. “In fact, there is a labor shortage and good wages. There’s always going to be roads, airports, buildings, infrastructure and houses that need to be maintained and remodeled. It’s the housing development business that’s particularly precarious. If you go into construction as a remodel contractor, you’ll do just fine.”

Getting creative

Prospering in a high-end market, takes creative expertise. Because Marin has so little land available for building, the majority of the construction work is either remodeling work or relatively small and/or private projects. There is also infrastructure work with ongoing road projects, pipe projects, and this year, projects related to the recent winter of heavy rains. “I talked to some of our members in the roofing industry, and they’re booked out into next year,” says Rick Wells, chief executive officer, Marin Builders Association. “The heavy rains magnified so many problems that now that the weather is better, our contractors are out there doing their good work.”

Though buildable land is scarce, builders are mostly busy with re-builds or remodels, for which the demand and the cost is high.  The only problem, and what drives prices up even more, is the shortage of workers. “The demand for quality labor and workers is at an all time high, and is even greater than last year,” says Wells. “It’s part of a booming market where, land values and home equity are up, and the cost of living and construction costs is rising, and demand remains exceptionally strong.” All of these factors, explains Wells, contribute to each other’s rise.

One new factor is recently intensified anti-immigration measures.  While skilled immigrant labor may still be scarce, as in other counties, employers need to be aware of conditions that may affect some of those on the job. “We’re partnering with experts and other organizations to offer information about how to prepare for potential ICE (Immigration and Customs Enforcement) raids,” says Wells.  “It’s important for business owners to be educated around what could happen at their workplace or job site. And that’s information that’s relevant to running their business effectively.”

Reputable contractors
Another factor that helps to perpetuate the rising costs of building a home: rising expectations on the part of home buyers. “People aren’t necessarily looking for the most cost-conscious contractor any longer,” says Wells. “We’re seeing, in our referrals, people who are seeking out reputable, quality contractors that stand by their work. People aren’t necessarily considering cost as the only component of their project any longer. They’re placing a premium on expertise and guidance from their contractors to help them navigate the process.” This is partly because the process of building or remodeling a house potentially complicated, with new rules and regulations, and partly because of the wealth of clients, who can afford the consultants and advisors and lawyers who may be needed to shepherd a project through to completion. “To a person,” says Wells, “the permitting and inspection process in the industry is complicated and inconsistent.” The process can be exceptionally complex, with cost changes and miscommunication. It can take any combination of designers, lawyers, consultants, owners’ representatives, architects, environmental engineers—a bevy of professionals, not just the contractor or owner, to navigate the process. “One of our ongoing initiatives is to help simplify that process here in Marin, and make it more universal so that both home owners and industry professionals can navigate that process more smoothly.”

Creative solutions

In Marin and Napa Counties, where available land for building is practically nonexistent, finding vast tracts of land to build’50s style developments to solve the problem is not likely to happen. But a closer look at the issue uncovers new possibilities for thinking about and creating housing. “Basically, part of our housing issue is that we have so many empty nesters here in Marin that a giant percentage of our housing stock is under-populated,” says Wells. “There are thousands of three- to five-bedroom homes meant for families that are now populated by one and two people. Our housing was built to carry more, but we’re not utilizing it.” Not only that, but the vast majority of workers commute into Marin because they cannot afford the rents. “I believe the last statistic I saw was that 63 percent of the workforce in Marin County commutes in,” says Wells. As a result, there’s an excess of a high-end housing and a lack of affordable housing. Is there a solution?

Wells suggests Junior Accessory Dwelling Units as part of the solution. These are scaled-down versions of Accessory Dwelling Units, and may be one viable solution for homeowners with space who need extra income and for renters needing a simple space.  “Thanks to Rachel Ginis at Lilypad Homes, new state legislation allows for these properties to be used in multiple capacities, without the expensive, permit-heavy process of creating an independent and separate unit.” (See “Junior Accessory Dwelling Units” on page 55.)

Infill development and remodels

Kirk Geyer is a designer/builder/developer who focuses mostly on projects where he can acquire and subdivide smaller-development properties with two to six houses that his wife will then sell. Most of his projects are in Napa, though he recently finished a project in Mill Valley, and says the issues in the two counties are similar. “Builders and developers are the tip of the spear when it comes to paying fees,” he says, listing some of the fees that add on to the square-foot price of a house before construction starts. “School tax, which is flexible, hovers about $4.75 a square foot,” he says. “The sanitation district is another $8,600. Then you have connection fees of around $6,000 for the water department, per house. Add your low-income housing tax, parks and recreation fees, and then any bond measures or special district fees on top of that. When you build a house in Napa, it averages about $60,000 per house just in fees. These are costs you incur before you stick a shovel in the ground.” In short, he says,  “All fees have gone up across the board.”

When you have acquired land, funds and have paid the fees to proceed with construction, the next hurdle is the shortage of labor. “Due to the housing recession, many skilled workers had to seek other fields of employment. As a consequence, prices for labor have gone up,” he says. “Then projects tend to take longer because of the depletion of the labor pool. That stretches out the time between the developer’s investment and his pay-off, so prices need to reflect that as well. I’m sure eventually the water will seek its own level, but that has been an impact.”

Excessive regulations
Some people say that too many regulations are the problem, so would getting rid of them help? “There’s a bit of truth to that,” says Geyer. “Some regulations are very beneficial. We’ve been recycling on our projects for a long time. One, because it’s the right thing to do, and two, because it’s more cost effective. For example, we recycle concrete products at our local rock quarry where it’s repurposed for road base and asphalt.

“If you take it to a transfer station it’s expensive. We recycle all the lumber off our projects, which is converted into landscape mulch. It’s the same with sheet rock. Municipalities and the state have mandated these policies and made it part of their building programs.” What Geyer sees is an overall value, balancing the cost and the aims of regulations. “The latest water-wise practices work well,” he says. “Yes, it does increase costs to your business, but remember, you’re putting a burden on the water system by building additional homes. So it’s a give and take. We can see that, even after seven years of drought, the balance is working. We don’t have moratoriums on water in Napa.”

Geyer sat on the board of the community development advisory committee for years. “They’d talk about how the state wants us to address affordable housing. We concluded that reducing fees, loosening parking regulations and minimizing building setbacks would make it more feasible for homeowners to add second units on their properties.” The city of Napa recently changed its zoning regulations, according to new state regulations regarding parking, building setbacks and size of second units. The fee issue has yet to be addressed.

Looking to the future
What does the future hold? “The housing industry is going through a real metamorphosis,” says Geyer. “Twenty-five or so years ago, 70 percent of residential homes were occupied by families. The rest were ‘others’ – singles, empty nesters, etc. Now, the roles have been reversed. Thirty percent of the homes are occupied by families, and 70 percent are occupied by the others.”

Currently, the desired model will be different from the old American standard—three-bedroom, two-bath single family unit, according to Geyer. “Now, people are looking more for homes with two master-bedroom suites, along with an office, great room, dining, kitchen, outdoor living area and a second unit,” he says. “This type of home is typically more expensive. However, it provides for multi-generational living, along with the possibility of rental income from a second unit that helps with affordability. These type of dwellings allow for flexibility of use and are gaining traction in the Bay Area.”




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