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Regulations Account For 40% Of Multifamily Development Costs

By Lynn Pollack

June 10, 2022 at 08:23 AM

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Most developers avoid building where rent controls are in place.

Government-imposed regulations account for more than 40% of all multifamily development costs, according to new research by the National Association of Home Builders and the National Multifamily Housing Council.

And “some of these regulatory mandates can discourage developers from building in the very marketplaces that have the greatest need for more housing,” the entities write in a new report breaking down the data. “This can prove to be particularly burdensome in a world of rising costs.”
Nearly 48% of multifamily developers said they avoid building in jurisdictions with policies like inclusionary zoning, and a whopping 87.5% will avoid building in a jurisdiction with rent control in place. Typically, when inclusionary zoning is at play, a density bonus is provided to developers to allow them to include more units than would normally be permitted by zoning. But according to NAHB/NMHC, “these incentives are often inadequate and do not fully cover the lost rental revenue.”
“In those cases, developers are forced to raise rents on the unrestricted apartments to fill the gap or to abandon the project altogether because it is no longer financially feasible,” they note. “These mandates were present in slightly over one-third (38.8 percent) of respondents’ typical projects, and when present, they made up an average of 6.9 percent of total development costs. Respondents subject to inclusionary zoning report having to raise rents by an average of 7.6 percent.”

The research also shows that NIMBY opposition to multifamily development adds an average of 5.6% in total costs and delays delivery of new units by an average of 7.4 months

“While most Americans agree that we need more housing and more housing affordable to middle-income households, too many change their opinion when someone proposes to put that new housing in their neighborhood. The intensity of opposition is escalated if that housing is rental housing,” the report notes.

The trade associations ultimately conclude that when development costs rise, so do rents.

“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,” they write. “The purpose of this report is not to argue that all regulation is bad and should be eliminated, but that some of these regulations are likely duplicative as multiple levels of government impose regulations on the same project. In addition, many of these regulations do not have a relationship to resident safety or building integrity.”

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