Why San Francisco has the second-highest construction costs in the world

San Francisco has the world’s second-highest construction costs because of complex, burdensome approvals, a severe labor shortage and easy paths for opponents to delay projects, according to a new report.

The city’s average construction costs of $330 per square foot was second only to New York, according to a study last year by Turner and Townsend, a construction consultant. Apartments cost around $425,000 per unit to build, exacerbating the region’s housing crisis by requiring high rents or massive public subsidies to make construction feasible.

UC Berkeley’s Terner Center for Housing Innovation surveyed developers, contractors, architects and nonprofits building market-rate and affordable residential projects on why costs are so high. Respondents said that city agencies have a complex and unwieldy permitting process, noting “additional hoops and requirements seem to pop up at various stages in the process.” They also pointed out that building inspections that aren’t standardized and lack of coordination between departments adds time to the process.

In recognition of these issues, the late Mayor Ed Lee issued an executive directive last fall calling for more streamlined approvals for housing and a new point person for housing in each agency that oversees approvals. City departments are now implementing the changes.

The Terner Center recommended that city staff be assigned to help projects get through the approvals process, a role currently fulfilled by private consultants. It also called for a review of building codes to standardize inspections.

A years-long labor shortage in the construction industry is also driving up costs. Scarcity of subcontractors and skilled workers has been a major obstacle for new construction, said Michael Theriault, secretary-general of the San Francisco Building Trades Council, which represents construction unions. A lack of construction workers is a legacy of the 2008 recession, when many people left the industry as development froze.

“We have been training up apprentices at an unprecedented rate since the turnaround began,” said Theriault. “But it takes three-to-five years for them to graduate to journey(man) level.” Becoming fully skilled takes around a decade, he said.

The city’s median home price, which hit a record $1.5 million last year, is also pushing construction workers to cheaper cities, making it harder to satisfy local hire goals.

The Terner Center cites modular housing as a way to lower construction costs, but Theriault and construction unions are critical of the practice, which typically shifts labor out of the city and sometimes out of the country.

Developers have said modular housing, which involves assembling segments of a project off-site and shipping them in, results in a 20 percent savings, but Theriault wants to see more data proving those savings. The city is now seeking developers to operate a modular factory within San Francisco, something the local unions support.

Design requirements such as facade aesthetics, balcony spaces and more expensive materials were also cited by the Terner Center as cost burdens. Those requirements are particularly challenging for affordable projects, which rely on public subsidies to be financially feasible and can’t charge high rents to cover extra costs. As a result of the requirements, some affordable projects have had to reduce unit counts, according to the report.

“Our members strive to deliver affordable homes that are safe and attractive today and for generations to come. Given the extreme need and given the proven positive community benefits that result to families and neighborhoods, it is critical that we push to streamline the process and reduce barriers so that our members can build affordable homes in the most efficient and cost-effective ways possible in this challenging environment,” said Amie Fishman, executive director of the Non-Profit Housing Association of Northern California, in a statement.

Another cost escalation is opposition to projects, with almost every major San Francisco development vulnerable to an appeal to the Board of Supervisors or Board of Appeals. The Terner Center noted that while few appeals result in a project getting rejected, they add more delays. Some major projects such as 5M, the Warriors Arena and Treasure Island have also been sued, tying up construction for a year or more.