Powerful Multifamily Industry Ideas You’ll Surely Want To Know
Bureaucracy significantly negatively affects multifamily development projects and the entire multifamily industry. A new study published by the National Multifamily Housing Council (NMHC) and the National Association of Home Builders (NAHB) finds that. In fact, the study determined that regulations imposed on multifamily development projects at all levels of government account for more than 40 percent of the cost of multifamily developments.
The findings of this new study come as no surprise to industry experts who have argued for decades that the multifamily industry continues to suffer due to mounting regulatory costs. These costs include the wide range of standards, fees, and other governmental requirements that are imposed at various stages of the multifamily development process.
As part of the joint effort, the NMHC and the NAHB surveyed members to determine how much regulation exists in the multiple family industry and what it adds to the cost of the development of much-needed multi-family housing business plans. The results, according to industry analysts, are not surprising.
How the NMHC/NAHB Study Was Conducted
In April 2022, both the NAHB and NMHC distributed identical surveys to their membership, accessing a range of development scales from across the country to quantify how much government regulation exists in the multifamily industry and how much it adds to the cost of multifamily development.
Some market survey questions for apartments helped quantify regulation impacts that directly increase project costs, affect housing supply, and affect housing cost in the community by eliminating projects altogether. Other questions related to community opposition and its financial implications for multifamily development projects.
In the end, the joint survey received 49 usable responses combined with existing public data and other survey information to determine the percentage calculations published in the study.
An Introduction to the NMHC/NAHB Joint Multifamily Industry Report
It is no secret that multifamily development projects are subject to various regulations at every government level. Although some governmental regulations are needed for protecting the safety and welfare of residents, the building, and the community, it is important to recognize that every regulation has a financial impact.
In this day and age of rising costs and inflation, each added regulatory cost ultimately gets handed down to the renter. With each added cost, developers are forced to increase rents to keep the project financially feasible. Unfortunately, as the lack of affordable housing continues to plague the county, these costs continue to feed the unaffordability cycle.
Multifamily industry regulations touch on various issues. Although they are often well-intentioned, agencies should be weighing the cost and burdens of any regulations they impose against the benefits. Of course, there is no doubt that basic structural safety standards, for example, are necessary. However, when rules eat up more than 40 percent of a multifamily product’s development cost, one has to wonder how thorough the government is in considering the potential consequences of its regulations.
The organizations embarked on this joint research project to determine how much these regulations add to the cost of development using a survey that was distributed to multifamily industry developers. The result was as follows:
- Zoning Approval Application Costs: 3.2%
- Site Work Costs (required studies, fees, etc.): 8.5%
- Development Requirements (mats, layouts, etc.): 5.4%
- Open or Dedicated Land Costs: 2.4%
- Construction Authorization Fees: 4.4%
- Affordability Mandate Costs: 2.7%
- Cost of Changing Building Code Over the Last Decade: 11.1%
- Cost of OSHA or Other Labor Regulation Compliance: 2.6%
- Cost of Delays: .5%
These average figures, when combined, add up to 40.6 percent of the cost of multifamily development.
A Deeper Dive Into the NMHC/NAHB Joint Multifamily Industry Report
Based on these numbers, the NMHC and the NAHB believe these expensive regulatory mandates might discourage multifamily vendors from constructing multifamily housing in the areas with the greatest need. In fact, 47.9 percent of developers surveyed said they specifically avoid building multifamily developments in areas with inclusionary zoning policies. A full 87.5 percent of developers in the multifamily industry said they avoid construction in jurisdictions where rent control is in place.
The study also found significant obstacles to multifamily development on the community level, unrelated to government regulations. For example, the study found that NIMBYism (“Not in My Backyard”) and community opposition adds 5.6 percent to the total development cost of multifamily development and delays project completion by 7.4 months.
Although the average American agrees that there is a need for more affordable housing for middle-income households, opinions quickly change when housing is proposed for the neighborhood in which they live. This opposition only intensifies if the multifamily housing proposed is rental.
The study found that the highest average multifamily industry regulatory cost results from changes in building codes (11.1%) in the last decade. The second-highest regulatory costs (8.7%) are imposed after site work commences. The lowest cost impact came from the financial cost of project delays (.5%).
Regulatory costs first appear when applying for zoning approval. The associated costs at this stage vary and can include fees to the local jurisdiction to pay for the approval process or fees for required environmental impact studies. In 93.9 percent of the cases outlined in the study, the NMHC and the NAHB found that the multifamily development required a special exemption or rezoning from the local jurisdiction, which added, on average, 3.4 percent to the overall development cost.
When site work begins, it is not uncommon for local jurisdictions to require a whole host of other studies and charge additional fees. These fees may include utility impact fees, for example. The study found that 98 percent of respondents reported paying these fees, which represented 8.7 percent, on average, of the total development cost.
The study also notes that local jurisdictions required 91.8 percent of respondents to include features in the project’s design that went beyond the features they might ordinarily include, such as energy-efficiency upgrades and specific façade design requirements. When present, these regulations represent 5.8 percent of the total development cost on average.
It is not uncommon for governments to require a developer to leave a part of the multifamily development site unbuilt or dedicated to government use, reducing the area of developable land and directly affecting revenue. The study found that 51 percent of respondents were forced to give up some of their property, resulting in an average cost of 4.7 percent of the overall development cost.
Of all the respondents, 95.9% had to pay building permit fees or utility hook-up fees as part of their multifamily development project, which made up, on average, 4.6 percent of the total cost.
The study also found that affordability mandates were another significant cost driver. Such mandates, designed to increase affordable housing supply, include inclusionary zoning. Inclusionary zoning regulations require that a developer offer a percentage of units at below-market levels. In these cases, developers are usually given a density bonus, allowing them to build more units. However, the study found that such incentives are generally inadequate and won’t cover lost revenue.
Such mandates were reported by 38.8% of the survey responses and, when present, accounted for 6.9 percent of the project’s total development cost.
As noted above, compliance with building code changes in the last ten years is the single largest driver of multifamily development costs, amounting to a whopping 11.1 percent. Across the country, jurisdictions have continued to adopt, revise, and enforce new building codes, and a whole industry has emerged in support of changes to existing regulations.
While the NMHC and the NAHB acknowledge the important role that building codes play in building integrity and resident safety, the organizations argue that these codes have gone beyond their original purpose. Today, these building codes are used in the promotion of public policies like sustainability and energy efficiency.
The development and adoption of new building codes are complex issues, united multi family industry experts say, that must consider their impacts on housing affordability.
It is not just local and state jurisdictions that adopt and enforce these building codes. Federal policymakers are also involved in developing codes and promoting their adoption. The U.S. Department of Energy, for example, has encouraged states to consider adopting the most stringent model energy code. Policy groups, industry organizations, and companies also continue to lobby for code changes promoting their own interests.
Multifamily industry experts say that these changes often fail to balance affordable housing needs and potentially increase construction costs without any significant improvement to building integrity or resident safety.
Another significant cost faced by multifamily developers is the need to comply with OSHA (Occupational Safety and Health Administration) requirements and other labor standards. There is no doubt, NAHB officials say, that measures taken to protect workers’ safety and health are essential. Still, they argue that certain OSHA policies, such as the application of its beryllium standards, drive up construction costs while having no impact on health or safety.
Of all the responses, 93.9 percent had to comply with such regulations, adding, on average, 2.7 percent to the total development cost. Nearly all respondents also reported a significant project delay due to regulatory compliance.
The study estimated the cost of such delays to be.5 percent of the overall development cost. While this might not seem significant, the NMHC and the NAHB argue that in this era of rising construction costs and diminished affordability, even the smallest cost can impact a multifamily development project’s feasibility.
How Affordability Mandates and NIMBYism Discourage Multifamily Development
In addition to rising development costs, the study also found that certain restrictions and regulations significantly impact whether or not a multifamily development project even happens in the first place. This finding is particularly alarming to us multifamily market analysts, considering the fact that our country is in the midst of a housing crisis.
Among the many factors that developers consider when choosing a project site, they consider the market demand for any proposed units. Sadly, this study found that developers are often forced to reconsider their plans thanks to affordability mandates. Two common mandates include rent control and inclusionary zoning, which some multifamily industry experts say are misguided solutions to the affordable housing shortage.
According to the NAHB and the NMHC, research shows that such “quick fixes,” especially in the case of rent control, have several pitfalls. One pitfall is that such mandates can deter development altogether.
The study found that nearly half of all respondents (47.9 percent) said they specifically avoid developing in areas with inclusionary zoning policies. A majority of all survey respondents (87.5 percent) said they avoid developing in jurisdictions with rent control mandates.
Multifamily publications say that because these mandates impact a project’s long- and short-term financial feasibility, many developers simply avoid proposing developments in jurisdictions with such mandates. The NAHB and NMHC study backs up that argument.
The study found that another significant impediment to multifamily development is neighborhood opposition or NIMBYism. NIMBYism can take many forms. Community members may fight back against rezoning efforts or file lawsuits to prevent development. Nearly three-quarters (74.5 percent) of those who responded to the survey reported neighborhood opposition to their multifamily construction projects. The resources dedicated to overcoming neighborhood resistance added an average of 5.6 percent to the overall development costs and delayed development timelines by 7.4 months.
NMHC/NAHB Study Conclusions
As this new report demonstrates, multifamily development is subject to an array of regulatory costs that include broad-ranging fees, regulatory standards, and governmental requirements imposed at various project stages. As a result, on average, regulations imposed at all government levels account for 40.6 percent of the cost of multifamily development.
The NAHB and NMHC note that the research conducted was restricted to the impact regulations have on the cost of multifamily development. The study doesn’t factor in the rapidly rising cost of land, labor, and materials. When combined with these factors, it seems nearly impossible for a private sector developer to deliver multifamily housing for a price that most working people can afford.
As development costs increase, so do rents, resulting in the reduction of affordable housing. The fact is that a multifamily developer will not be able to secure financing for a project unless they are able to demonstrate to lenders that rents will sufficiently cover development costs and pay off loans.
Officials from the two organizations involved in the study say that the purpose of their report isn’t to make the case that all regulations are bad and should thus be eliminated. Instead, they say that many regulations across multiple government levels are likely duplicative. They also argue that some rules have no relationship to building integrity or resident safety.
At the end of the day, they say that the study and report aim to raise awareness about current regulation levels and their costs to developers as a way to encourage governments to consider the implications of new directives on housing affordability. They also say that they want local leaders to understand that they have the power to eliminate duplicative costs to lower the rent necessary for projects to remain feasible, improving their overall affordability in the long run.