Regulations drive up development costs by over 30%

A study of multifamily developers estimates the cost of regulations to multifamily projects, including the cost of delays
Regulations cost multifamily builders an additional 30% on average. (Photo: Kostyantin Pankin)

How much do regulations cost builders? About 30%, according to a new study.

A joint study by the National Association of Home Builders and the National Multifamily Housing Council found that local, state and federal regulations added on average 32.1% to multifamily developers’ project costs.

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The study found that many multifamily developers get hit with regulation costs twice: once when they pay zoning approval fees to local jurisdictions and again construction is authorized.

Code changes account for the largest share of the increase, raising costs by 7.2% on average, the study found. Additional building requirements to keep up with community design standards raised development costs by 6.3%.

Some of those design standards include things like landscaping, streets and sidewalks, and building height requirements. The report noted that developers will usually leave room for walking and parking, even if regulations don’t require them to, as well as accounting for landscaping. The survey asked specifically about regulations that go above and beyond what the developer would have done anyway and found 95% of respondents were subject to these out-of-the-ordinary design requirements.

Other regulatory costs include site fees (4.5%), authorization fees (4.2%) and applying for zoning approval (4.1%). Complying with OSHA requirements accounts for 2.6% of regulatory costs.

Paul Emrath, vice president for survey and housing policy research at NAHB and one of the authors of the report, acknowledged in a blog post that some level of building code makes sense, but some raise costs without providing their perceived benefit.

“No one would argue against standards for basic soundness and safety of structures, but building codes have been in place for decades, and have expanded well beyond this,” he wrote. “There is now a separate code devoted to energy conservation, for example, and NAHB has criticized particular changes to this code for limiting flexibility and driving up costs without improving energy efficiency (sometimes to the benefit of specific product manufacturers).”

As stakeholders in Colorado grapple with ways to address the shortage of affordable housing, one thing to keep in mind is the unforeseen cost of affordability requirements. Some developers pay a fee to avoid the mandate, adding to their hard costs; others don’t pay a fee but may lose money on the project, adding to their soft costs.

[Related: Are you building ‘affordable’ or ‘attainable’ housing?]

The survey found that a third of respondents have encountered costs associated with affordability mandates, adding an average 5.7% to development costs.

Beyond the costs to developers, the report questioned the effectiveness of affordability mandates. “These mandates without any offsetting incentive like a tax exception typically create few units and effectively tax some housing units (and their occupants) to subsidize others,” according to Emrath and report co-author Caitlin Walter of the National Multifamily Housing Council.

The report attempted to quantify the cost to developers when regulations delayed their projects, even if there were no direct costs. NAHB and NMHC estimate that when all other regulatory costs are subtracted, the additional interest charged on financed projects that were delayed due to regulations accounts for 0.7% of total development costs.

The study’s findings are based on responses from 40 multifamily developers, evenly split between NAHB and NMHC’s members. The survey was conducted in the fourth quarter of 2017.

Are you a single- or multifamily builder who has seen an increase in hard or soft costs as a result of regulations? Let us know.

Danielle Andrus

Editor, Colorado Builder Magazine

Danielle Andrus has 134 posts and counting. See all posts by Danielle Andrus

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