The Issue of Construction Costs in California

Nooh Palizi | NextGen Marin

Out of all the 50 states, construction is on average most expensive in California.

Why is this?

Well, there are a number of factors: excess demand to work and live in California, limited housing, and the fact that material costs (along with land and labor costs) are highest in California when compared with the rest of the country. Let’s explore each of these factors in a little more depth.

The primary reason why construction costs are so high in California is simply because there has not been enough housing built in the last few decades. According to KQED, it is estimated that California would need to build 180,000 new homes just to keep current prices stable, and California has only averaged half of that number over the entire previous decade. There was a huge construction boom in the early and mid 2000s, where new apartments and homes were being built across the state, but these new housing units weren’t built in the coastal cities, where the vast majority of Californians work. Places such as Inland Empire and Central Valley saw a huge building craze while San Francisco and Los Angeles had no significant construction.

Limited housing options combined with a huge demand to live, work, and own property in urban California is pushing the coastal metropolises to a breaking point. Between 2010 and 2017, around 20% of all new Californians were born in or moving into the Bay Area. In addition to the sharp rise in demand for Bay Area housing following the tech boom in Silicon Valley, there has also been a sizable increase in people wanting to move to L.A and San Diego. San Diego has seen a 15.14% increase in population within the years of 2010 and 2017, with 113,340 new residents. LA has seen a large rate of growth since 2010 compared to San Diego. Between 2010 and 2017, LA grew by 7.98%, adding 203,699 new residents. With all of these people wanting to move to California, there is huge competition for rental housing, pushing prices up further and further. Over the last 10 years, the state has witnessed the number of single-family homes occupied by renters increase by more than 400,000. As the number of owned homes in California rapidly declines, rentals are becoming the new normal for Californians.

Getting new housing approved in California is extremely difficult, expensive, and time-consuming. Just to get a new home approved and built requires going through multiple layers of government bureaucracy, such as city council, the fire department, the health department, the planning department, and building department. In many cases, huge opposition to building new housing arises from locals who believe that the projects will change the character of the neighborhoods, increase traffic, and hurt their property values. This is especially a problem in Marin County. While concerns about heavier traffic and lower property values are generally ill-informed, these concerns still manifest politically. When a city council member votes for a new housing project, he or she may have to face dissatisfied voters. A politician’s primary focus is getting reelected, so in most cases in order to retain their job they will most likely keep away from building new housing. The result of this pandering to small anti-growth constituencies is apparent; two-thirds of California coastal cities have adopted policies that limit the number new homes that can be built, driving up costs for incoming residents.

When it comes to prolonging housing growth, many opponents will use environmental law to derail future developments. When constructing a new home, government agencies will consider the impact it has on the environment. A statute such as the CEQA (California Environmental Quality Act) will delay a project on average for two and half years while supposedly determining the projects’ potential environmental impact. In the meantime, costs to build may rise and the developer can leave for greener pastures.

Not only is it hard to get a building approved, but when it finally does get approved the developer still must face the fact that land, labor, and raw material costs are higher in California than anywhere else in the country. And those costs are rising. While land costs generally eat up most of the developer’s budget, in the past five years construction, labor, and the cost of raw materials have also been increasing. Raw materials are much more expensive in California because of strict environmentally-focused building codes that require for pricier specialized raw materials to be used, such as the prices of softwood lumber, which rose by 8.9% in 2016! Additionally, construction labor costs in California are about 20% higher than the rest of the country, and what makes this even worse is that there is a shortage of blue-collar workers due to the rampant housing unaffordability. In the mid 2000s, low-income workers, especially in construction, left the state in huge numbers. From 2007 to 2016, 6 million California residents moved out while 5 million more residents moved into California. High costs and increasing bureaucratic obstacles work together to create a vicious cycle: housing development is needed to end unaffordability, but because of this unaffordability, development cannot take place!


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