The entire state of California is suffering from a deficiency in housing stock, which keeps rents escalating and housing affordability low. In fact, according to a study conducted earlier this year by Zillow and published by Forbes, four California cities are among the top 20 U.S cities where rents are spiking—with San Francisco having the largest annual increase. According to a recent UCLA Lusk School study, Los Angeles is the least affordable U.S. city in which to live.
Rising building costs, which are being fueled by skyrocketing land values and increases in building materials and labor costs, are adding to the cost of multifamily development. Add to this the increased cost associated with CALGreen regulations and one might wonder if residential development will be stymied, despite the desperate need for more of it. This could be of particular concern for the workforce housing category because the majority of residential units being created are luxury or “market rate,” with modest requirements or incentives to provide affordable, workforce housing.
Cost of sustainability
The California Green Building Standards Code (CALGreen Code) is Part 11 of the California Code of Regulations (Title 24) and is the first statewide "green" building code in the U.S. CALGreen is a stringent building code that was established for the purpose of reducing greenhouse gas emissions to pre-1990 levels, and lowering energy and water consumption and construction waste in efforts to protect California’s fragile environment.
Development of CALGreen began in 2007 and the adoption of the 2008 California Green Building Standards Code became effective August 1, 2009. Updates to the code led to the 2010 CALGreen Code, which was adopted by the California Building Standards Commission, California Department of Housing and Community Development, the Division of State Architect and the Office of Statewide Health Planning and Development (OSHPD). The 2010 Code was then updated to the 2013 CALGreen Code that became effective January 1, 2014, with a Supplement that became effective July 1, 2015.
CALGreen includes both mandatory and voluntary measures. Mandatory requirements involve water and energy efficiencies, high indoor air quality and the use of sustainable building materials. Voluntary measures, on the other hand, are encouraged to enhance the requirements and/or add sustainable features, such as photovoltaic solar, high-performance HVAC systems and high-energy efficient lighting fixtures.
While CALGreen is vital to sustainable development, it comes with a cost that must be borne by the developer, which in most cases is passed along to the building occupants in the form of higher rents or purchase prices.
To achieve CALGreen Tier 1, buildings must comply with the latest edition of “Savings By Design, Healthcare Modeling Procedures.” To achieve CALGreen Tier 2, buildings must exceed the latest edition by a minimum of 15 percent.
By way of example, presenting at a webinar of the Local Government Commission, Wes Sullens, of Alameda County’s StopWaste.org, noted that for an $8 million office project in Alameda County to comply with CALGreen Tier 1, the cost was $79,800, or about 1 percent of the total project cost. Tier 1 would qualify the project for 20 to 30 green points toward the 40 points needed for a minimal LEED certification. To achieve the certification, as Sullens points out, the developer would have to spend an additional $15,150. Sullens is chair of the LEED and CALGreen Task Group.
Another regulation that weighs on the cost to develop new buildings in California is the California Environmental Quality Act (CEQA), which adds time to the entitlement process. Time is money for developers. In coastal communities like Santa Monica, the CEQA process can take much longer and add legal fees to the developer’s costs, due to opposition, real or imagined, to the project.
A number of municipalities in Southern California also have sustainability mandates. For example, all commercial buildings in Santa Monica must qualify for a minimum of LEED Silver certification. According to a newsletter issued by the United States Green Building Council (USGBD) in September 2015, CALGreen meets LEED certification standards, but not the higher level LEED Silver certification standards (http://plus.usgbc.org/green-state/). State and local sustainability mandates will continue to increase building costs. The California Public Utilities Commission (CPUC), for instance, has already adopted a net-zero-energy goal in its strategic plan for all new residential buildings by 2020 and commercial buildings by 2030. (http://www.cpuc.ca.gov/PUC/energy/Energy+Efficiency/eesp/).
Despite the added costs, there are upsides. Buildings are now healthier environments in which to live or work and construction waste has been significantly reduced. Net operating costs are lowered, and when these costs are reduced, the value of a commercial project increases significantly. Further, with the unprecedented drought in California and the West, we are benefitting from a water conservation program enacted decades ago.
The question that remains is whether there is a point at which increased development costs will stymie projects like multifamily and affordable housing, which by most expert accounts is woefully underdeveloped in California.
Steve Pellegren, DBIA, serves as executive vice president of commercial building and construction firm Bernards.