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FAA Study on Multi-Family Cost Drivers Provides Key Insights for Policy Makers

Posted By: Eric Garduño Advocacy News , Industry News ,
Florida Apartment Association Report:
Drivers of Multifamily Housing Costs and Affordability in Florida

Florida needs to build 48,000 new apartment communities each year to keep up with housing demand. It is expected that much of this housing stock will be built through the creation of new market-rate apartment communities. 

According to a new report Drivers of Multifamily Housing Costs and Affordability in Florida by HR&A Advisors, the rent for a prototypical 1,000 sq ft 2-bedroom apartment in Tampa would need to be at least $1,590/month to cover anticipated development and operational costs.  This puts access to a new apartment home out of reach for a household making Tampa’s median family income of $57,900.  The report, commissioned by the Florida Apartment Association, found that Florida rents at apartment communities have increased 47% between 2010 and 2019. 

The report lays out a clear framework to understand the various cost drivers for apartment community development and operation.  In short, development costs and operating expenses are supported by revenue, in this case the rent that is collected.  Development costs include land, hard costs (i.e., labor, building materials), and soft costs (design, building permits, impact fees).  Operating expenses encompasses the financing required to cover development costs, as well as the various property management expenses (i.e., maintenance, staffing, insurance, and property taxes).  Cost increases for any of these factors ultimately increase the rent that needs to be charged.

With housing affordability a policy priority for many local jurisdictions, it is more important than ever to understand the cost drivers that impact the development and operation of new apartment communities, and which ultimately are reflected in the cost of rent.  According to the report, both macroeconomic trends and local policies implemented by municipalities play important roles in determining these costs.

Among macroeconomic trends, the cost of land suitable for apartment development in Tampa saw increases of over 11% annually between 2012 and the 2018.  Increasing prices for raw materials and labor led to construction cost increases of 3.5% annually since 2000, and more than 26% since 2017. 

Equally important are costs related to local government action.  The report modelled various scenarios to gauge how much certain actions would impact the rent on the prototypical new 2-bedroom apartment in Tampa and other Florida cities.  Note, each of these actions were pulled from recent real-world examples across the report’s focus cities:

  • A 15% property tax increase would lead to a $47 rise in rent.
  • A six-month delay in permit review, all the while construction costs increase by 5% during this period of inaction, would lead to $103 rise in rent.
  • An $8,000 per unit increase in impact fees would lead to a $48 rise in rent.
  • A new design element that increases construction costs by $2M would lead to a $60 rise in rent.

The report also highlights important challenges concerning racial equity in housing.  It found that census tracts with median rents below $1,000 often cannot support costs of building and operating new market-rate apartments.  These low-income areas tend to overlap with neighborhoods with higher proportions of people of color, leading to substantially less new apartment construction to serve these communities compared to higher-income areas.  The predominance of exclusively single-family zoned areas further exacerbates this challenge by artificially limiting where new apartment communities can be built, thus constraining the supply of more affordable housing opportunities across cities. 

The report offers suggestions to address some of the cost drivers:

Evaluate the impact of local policies on rent – it is not always clear to local policy makers what effect their actions have on rents in their jurisdiction.  Impact fees, tax increases, building codes, and bureaucratic processes can all contribute to higher rents in varying degrees.  While increases in these costs are inevitable, there should be an understanding on how much these actions will impact the cost of housing.  In evaluating policy choices, local governments should consider assessing how current and future rents will change because of actions, and how their choices will affect housing affordability in their jurisdiction.

Expand by-right zoning for apartment communities – In some cities, up to 90% of residential land is exclusively zoned for single-family use.  This exclusionary zoning practice artificially limits where new apartments can be built, constraining the supply of new apartments, driving up the cost of land needed for new apartment development, and exacerbating historical racial inequities.  As local governments contemplate comprehensive plan and zoning updates, consideration should be given to expanding the areas where apartments may be built and allowing increased residential densities. 

Streamline and reform permitting processes to reduce delays – Predictability is key to managing risk, and the development approval process should strive to achieve predictability as much as possible.  If projects require minor variances or no zoning or entitlement changes, then approvals should be straightforward, quick, and should avoid larger, discretionary review processes that inject unpredictability into the project.

Tax incentives to produce affordable housing and increase supply – Current law provides tax exemptions for affordable housing if a least 50% of the project is owned by a nonprofit.  Similar measures should be adopted for the construction or operation of naturally occurring affordable housing and workforce housing. 

Frame changes as means to address racial inequities – Zoning and planning policies have historically been used to exclude people of color.  As the report notes, the legacy of these policies continues into the present and highly discretionary development processes, where community opposition can stop multifamily construction, "can perpetrate an exclusionary status quo."  Expanding by right development and removing approvals from discretionary processes are steps to help reverse the exclusionary zoning practices that have historically limited housing options.