In the auditorium of a swanky Uptown Oakland hotel, architects, developers, and contractors settled into rows of seats to hear their colleagues discuss the state of the local homebuilding industry.
The conference would turn into a commiseration session, with panels of multi-family housing developers discussing how slow work’s gotten in the East Bay lately.
Last year, Oakland issued fewer building permits than it has in any single year since 2015. At the peak of the building boom in 2018, the city permitted 4,617 new housing units. In 2023, that number plummeted to 795. Large apartment buildings took the greatest hit.
“It’s no secret that the headline news is there’s nothing happening out there,” said Dan Calamuci, senior representative at the Nor Cal Carpenters Union, kicking off the first discussion at the East Bay Multifamily Summit on Wednesday.
Meanwhile, the housing crisis persists. The state has told Oakland to plan for 26,000 new homes by 2031, a good portion of which should be affordable for low-income residents.
Why then has construction waned?
Speakers agreed it’s a tough market for development due to a range of financial constraints and societal changes. But they also disagreed about the main causes of the crunch, how dire the dilemmas are, and the permanence of the problems. Here’s what they had to say.
The cost of building housing is up on all fronts
Profit drives private development, and builders are struggling to get their projects to “pencil out.” The cost of construction materials, insurance, interest rates, and labor have all shot up since the COVID-19 crisis began in 2020.
“We’re getting no relief,” said Christian Cerria, development director at Gilbane. “Construction costs are high. Insurance costs are high. And instead of having a year to do everything, equity partners want it all now.”
Just that morning, the Federal Reserve announced it would maintain interest rates around a high 5.3% in its ongoing attempt to curb inflation.
“The problem is federal,” said Benjamin Arcia, senior associate at McCullough. “It’s short-term thinking. There needs to be someone saying, look at what these policies are doing to our cities. If we build these cheap boxes because it’s really expensive…what’s going to happen in 80 years? Is someone going to knock them down?”
JP Walsh, director of finance at Panoramic Interests, pushed back, saying rate hikes staved off a recession.
“We were drunk in money with interest rates at 3%,” he said. “We’ve all got it in our psyches that interest rates are super high. But on a 30-year average, they’re not.” Walsh said it’s not only the feds affecting cost, but local governments too—through property taxes, environmental regulations, and the “impact fees” that market-rate developers pay to support affordable housing in Oakland.
Others complained that insurance prices have risen for several reasons, including environmental risks in the East Bay. Capri Roth, executive vice president of development at EBALDC, said the affordable developer has started looking at “Type I” fire-resistant construction in hopes of lowering insurance costs.
After a years-long building boom there’s a surge in housing supply
The state says Oakland is still facing an extreme housing shortage, to the tune of nearly 30,000 units. Yet, renters looking for apartments in the city now have far more options than they did a decade ago. They’re not as willing—or able, in many cases—to pay top tier rents.
“I don’t want to say over-building, but there’s increased supply downtown,” said Greg Christopher, an independent developer. He was previously an executive at Carmel Partners, which developed Oakland’s second-tallest building, the Atlas.
“There is no demand for new market-rate housing on the rental side,” he said. “The only thing that’s going to turn around and create demand is the whole economy of the Bay Area’s gotta take off again—job creation.”
“There is demand for housing in Oakland,” countered Andy Ball, president of oWow, “at a rate that’s affordable.”
Christopher agreed, but said developers can’t finance their projects through lower rents. As is, many properties are “now giving away eight to 10 months of free rent to get people in the door,” he said. Our reporting has indicated that, as of last fall, most of downtown’s new buildings are fairly full, but there’s significant turnover.
Some developers are now skimping on size and amenities in order to get projects to pencil out. “We’re not putting in things that we’re not getting paid rent for,” said Alvaro Leiva, senior vice president of asset management at Summerhill Apartment Communities.
Crime concerns are spooking some investors
Funders of private development—local, national, and international—pay attention to what’s happening in the cities where they invest. They want to pour their money into places where they think the market is hot and there’s high demand for pricey apartments. When there’s bad publicity, these companies flee.
“Our capital isn’t attracted to California right now because of the political landscape,” said Stuart Gruendl, CEO of BayRock Multifamily. “It’s been a tectonic shift over the past couple of years.” Oakland has received especially negative attention around crime and conditions.
“The media spins it as the Bay Area is dying, it’s a horrible place to live,” said Cerria. “I think the opposite.” His family moved here from the East Coast and loves it, he said. “But wherever your financing comes from, they’re hearing that. There’s an article every day, pretty much, dissing us.”
“When we get term sheets for debt, they say, ‘We just read an article,’” added Ball. “It may be a perception; some of it’s reality.” But the concern is so high that oWow has fully redesigned buildings to better accommodate renters who tell them they spend most of their time at home—whether for remote work or hesitation to go out at night, he said.
Migration patterns have also shifted over the past few years, developers said.
“Oakland has historically drafted off of San Francisco,” said Christopher. But “the legacy of the pandemic on work-from-home and the tech industry” is changing that. Meanwhile, Arcia said, “There’s a huge Gen Y population moving out of San Francisco to the suburbs.”
Affordable housing is hard to fund
Affordable housing is especially needed in Oakland, but particularly tough to finance. While private companies can recoup investments in market-rate development through rents, that’s not the case with buildings priced to be affordable for low-income residents. The nonprofits that develop affordable housing rely on tax credits and public subsidies, most pulling together many different funding sources.
“It’s a marathon,” said Jessica Musick, principal at KTGY. “It takes a lot of tenacity to see a project from the [first funding award] to completion—seven to 10 years.”
Affordable developers have the financial and social duty to essentially “solve the world’s problems in the units we’re building,” said Denice Wint, vice president of real estate development at EAH Housing. From housing homeless people to meeting environmental standards and addressing crime, she said.
When market-rate development slows, stymying the impact fees and other money that developers and property owners pay to Oakland, the city has less money to distribute to affordable projects. The nonprofit developers are facing many of the same challenges as their private counterparts, plus some unique struggles.
“If you’re serving formerly homeless residents, you’re often flagged by insurance companies as higher risk,” said Roth.
There are some signs of change on the horizon
Some speakers said the barriers to building in the East Bay are temporary.
“I’m sick of hearing about the heyday of 2019,” said Colin Behring, CEO of Behring Companies. BART, UC Berkeley, and other features that connect the East Bay and draw people to the region are “permanent,” unlike public safety cycles, he said. “We’re going to be positioned for greatness—not in 2024, but it’s coming.”
A spate of new state laws has also enabled developers to build dense housing in more locations, and with fewer bureaucratic hurdles. Combined with activism around the housing shortage, the loosened restrictions have made it easier and cheaper to build both in cities like Oakland and in suburbs that used to put up a fight, developers said.
“Ten years ago you would have heard, ‘I don’t want a bunch of single-family renters next to my neighborhood,’” said Gruendl. “You don’t hear that anymore because of all the pressure on pro-housing.”
Ball effused about oWow’s new housing tower on Webster Street. Instead of steel or concrete, it’s made of mass timber. He said his company started planning the building as soon as they heard California would approve the material for highrises a few years ago. Mass timber is cheaper to build with and can be more sustainable if the wood is sourced from well-managed forests.
“We’ve absolutely cracked the time-and-cost code,” said Ball. The project dropped from $100 million to $72 million, and the top floor took just a couple of months to build, he said. Rents will be cheaper than comparable buildings, he said.
Affordable development got a boost in Oakland, too, with the 2022 passage of Measure U, a bond dedicating $350 million to low-income housing. Developers said the California Housing Accelerator program has been another game-changer.
Others are setting their sights on an effort to put a $10 billion to $20 billion regional housing bond measure on the ballot across the Bay Area.
