Construction expenses have pressured developers severely enough that new market-rate apartments are profitable in no more than two districts in San Jose, according to a new report presented to city officials Tuesday.
Even worse, downtown San Jose — seen as a cornerstone of the city’s economy — is one of the sections where development of new housing is unlikely to produce profits for developers, a report from real estate consultancy Keyser Marston Associates determined.
“The housing market currently faces challenges due to high development costs and the inability to project future rent growth to offset rising costs,” Keyser Marston stated in the report. Experts also blame more expensive materials and labor costs for the construction woes.
Just one section of San Jose fit the criteria to be able to produce enough of a profit — at least 10 percent — to justify the risks involved in a major residential development, according to Keyser Marston.
“The only apartment prototype to demonstrate an estimated profit that exceeds the targeted profit threshold is in the West Valley” of San Jose, an area that includes the Stevens Creek Boulevard district, the consultants reported to the council.
The average profit margin in western San Jose was deemed to be $108,000 per apartment unit, or a profit margin of 19 percent of the development costs, the report found. These were based on development of mid-rise apartments reaching as many as seven stories, with parking below the housing units.
A relatively puny profit was found to be possible on West San Carlos Avenue, west of the downtown, or on North First Street, north of the downtown. That modest amount was $17,000 per apartment unit, or 3 percent of the development cost. However, a 3 percent profit wasn’t deemed high enough to justify the risk of construction. In this scenario, the developments were projected to be up to seven stories, with the parking below the residences.
But downtown San Jose apartment towers? No profit. North San Jose mid-rise apartments? No profit. Low-rise apartments in east San Jose and south San Jose? No profit. The locations also might put a damper on plans for transit villages in some instances due to the location.
The report arrived at a time when several apartment towers have been proposed for downtown San Jose.
“Even if we continued with many incentive programs, these downtown San Jose towers don’t look feasible,” said Kim Walesh, the city’s director of economic development.
Last week, after a study session to discuss the construction crisis, Mayor Sam Liccardo told this news organization that it might make sense to chop certain city fees or red tape to ease the financial burden on building projects, although there’s only so much the city can do to combat market forces.
“At the very least, we need to take a hard look at reducing our fees and reducing our red tape,” Liccardo said.
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