Exclusive: Costs are stalling a new SoMa housing project despite S.F.’s record-high rents

Developer AGI Avant just finished a 263-unit project in San Francisco’s Dogpatch that is 70 percent leased.

AGI Avant is getting rents of $3,000 per month for a studio or over $5,000 per month for a two-bedroom townhome. At over $5 per square foot, the rents are some of the highest in the country, behind only Manhattan. The project at 2660 3rd St. has met the developers’ pricing goals, said Eric Tao, CEO of AGI Avant. The company’s partners on the project are Sares Regis Group of Northern California along with the pension giant CalPERS.

Yet AGI’s next project, a 299-unit rental development at 1270 Mission St.approved last year, isn’t starting construction despite the city’s sizzling rental market.

Tao blames construction costs for the delay.

“This is a project that made all the sense in the world two years ago,” said Tao. “We foolishly believed that construction costs could not continue to escalate like they have.”

He expected construction costs to rise 6 percent to 8 percent, but instead they’ve gone up around 10 percent. That translates into construction costs of $450,000 to $500,000 per apartment unit, up from $300,000 to $350,000 per unit four years ago, said Tao. (That price excludes the costs of land, design, entitlements, fees and permits.)

Across the Bay Area, rising construction costs are making it harder to build projects, which developers say is exacerbating a housing shortage and requiring ever-higher rents to justify investment.

A study from UC Berkeley’s Terner Center said San Francisco has the second-highest construction costs in the world, with developers, architects and contractors blaming a labor shortage and convoluted city approvals as factors. This week, construction consultant Rider Levett Bucknall said San Francisco had the second-highest costs among U.S. markets, with a 7.6 percent escalation in costs between October 2016 and October 2017.

John Rahaim, San Francisco’s planning director, told the Business Times last July that housing proposals had also dropped in 2016 and the first half of 2017. “It’s two reasons: It is the inclusionary (affordable housing requirements). We saw a drop in large applications in the middle of last year. And it’s construction costs,” he said.

Major projects such as 1,679-unit Schlage Lock development and Build’s One Oak tower are still seeking financing before they can break ground. Schlage Lock is also one of a number of megaprojects that still needs city permits.

Costs aren’t preventing other housing projects from moving forward. Developers Group I, Shorenstein and Tidewater are each slated to break ground on different projects in Mid-Market – not far from AGI Avant’s site – in the next few months.

Tao said AGI has a long option agreement to buy the land so it can afford to wait and “hope construction costs go down or rents go up.” AGI Avant and manager Resmark’s Bay Area urban housing development fund with $150 million in equity from CalPERS will fund the project, which was designed by Architecture International.

Tao said he’s also looking at ways to increase revenue for the building, but declined to elaborate.

“This storm has to pass,” said Tao.