How higher costs can hurt housing construction in Sonoma County and beyond

A recent Windsor Town Council meeting sounded like a battle of the builder budgets, with one saying that costs to build housing in certain areas of the region require more single-family homes, while another countering that nonprofit homebuilders were able to get subsidized single-family homes built in the region for less.

Steve Reilly of 330 Land Co. is the latest developer to take on reworking the long-vacant Windsorland mobile home park at 9290 Old Redwood Highway into permanent dwellings. Reilly tried to convince council members that the realities of what it costs today to build market-rate apartments and town homes necessitate leniency on how many housing units are required to be built on the 18.3-acre property. Reilly advocates for construction of detached single-family homes that are in reach of first-time homebuyers.

Another builder, Efren Carrillo, now CEO of Gallaher Community Builders and formerly head of business development for Santa Rosa nonprofit Burbank Housing, spoke in opposition to 330 Land’s idea for a lower-density project. Carrillo asserted that Burbank in 2021 was able to build smaller entry-level single-family homes in Napa and Santa Rosa. If 330 Land’s single-family homes were smaller, the site could have room for more apartment buildings.

In talking with other contractors and developers who are working housing projects across Sonoma, Marin, Napa and Solano counties, the Business Journal has learned that both Reilly and Carrillo are right about cost challenges for building market-rate homes.

Reilly, whose Irvine-based company also has market-rate housing projects underway in Napa and Marin counties, offered the Town Council his explanation for why the two previous developers on the two-decade-old Vintage Oaks project ran into financial trouble and why he determined the project as approved with 387 apartments and townhomes was not feasible.

“It's an easy --- somewhat easy --- explanation in that the construction costs have now exceeded the value of the completed units,” Reilly said in a presentation to the Town Council Nov. 15.

After the town Planning Commission on Sept. 26 gave a cold reception to the concept of ditching the previous approval for 387 apartments and town homes at the defunct Vintage Oaks project with 133 single-family homes on small, 2,400-square-foot lots, Reilly came to the Town Council with a pitch for 125 single-family homes and 108 multifamily units. But both the commissioners and council members stood firm on the town’s central planning documents calling for high-density, transit-oriented housing near the forthcoming SMART station and Town Green.

Reilly noted to the council that if the cost of buying and holding the land were taken out of the equation, just the cost of building a multifamily complex --- including construction cost inflation and project financing --- then getting the units leased to a sustainable level of occupancy would result in a rate of return on the investment that would be too low to attract a conventional lender such as a bank or an alternative funding source such as private equity.

He pointed to several affordable-housing projects under construction in the northern Sonoma County town that had costs per unit that were higher than what comparable market-rate complexes are selling for per unit. The 52-unit Redwood Views project at 8490 and 8500 Old Redwood Highway had a construction budget of $22.7 million, or $435,211 per unit, according to the October 2022 state tax credit award document. Shiloh Terrace, with 134 units at Shiloh Road and Old Redwood Highway, is being built for $80.7 million, or $551,384 a unit. At 295 Shiloh Road, the 173-unit Shiloh Crossing project cost $79.4 million, or $447,936 a unit.

Reilly said that market-rate apartment complexes have been selling in Silicon Valley recently for $400,000 to $450,000 a unit.

When market rents in Sonoma County are averaging around $3,000 a month per home and the cost load on a project is high --- a capitalization rate of around 6% in today’s high-interest environment --- a seller of a complex may be only able to get $385,000 a unit, Reilly noted. That gap between cost to build and what investors would pay for a complex is making market-rate multifamily housing challenging to build.

But what’s complicating the housing cost equation further are factors unique to Sonoma County as a population center in the Bay Area: availability of contractors and labor, and the cost of insuring projects.

“As crazy as it sounds, it’s actually cheaper to build in Marin than it is to build in Windsor,” Reilly said, noting that the cost can rise 30% to 40% the further north the project is located. 330 Land has a 44-home project proposed in west Marin County’s Lucas Valley area between San Rafael and Novato, and it got approval to build 216 single-family homes with 58 accessory units at the Watson Ranch development in American Canyon in Napa Valley.

The cost difference comes from available contractors largely coming to North Bay projects across the Richmon-San Rafael Bridge from the East Bay and up Highway 101 or coming across the bridges into Solano County.

Petaluma-based Midstate Construction, a commercial and multifamily housing general contractor, is pulling contractors for North Bay projects largely from Vacaville, Dixon, Davis, Roseville and Sacramento, and for South Bay projects mainly from Tracy and Livermore.

“What’s driven up the cost for many years is a shortage of labor and construction companies in this area,” said Patrick Draeger, Midstate’s chief estimator.

Larry Florin, CEO of Burbank Housing, said a big cost hit in the past year has been builder’s risk insurance because of the new wildfire zone changes. He noted that such coverage used to cost $30,000-$40,000 a project, or 0.3%-0.4% the job value, but that has gone up to $300,000-$400,000 a project, or 1.2%-1.3% of the value.

Florin also noted that Sonoma County local construction impact fees are higher than in other jurisdictions in the North Bay where the nonprofit builder has projects.

Jeff Quackenbush covers wine, construction and real estate. Reach him at jquackenbush@busjrnl.com or 707-521-4256.