Affordable Housing Cost Study: Summary of Findings

Affordable Housing Cost Study:Summary of Findings Matthew Newman Blue Sky Consulting Group July 2, 2019

Introduction • Study overview • Social and economic benefits of affordable housing • Methodology and data • Regression analysis results • Land cost analysis • Findings summary

Study Overview • Analyzed social and economic effects of affordable housing based on published research • Collected OHCS data for 172 affordable projects placed in service between 2000 and 2018 • Analyzed factors that influence costs • Compared construction costs of affordable projects to comparable market rate project data using RSMeans cost estimation software

Social and Economic Benefits of Affordable Housing • Extensive body of research exists on social and economic benefits of affordable housing (beyond primary benefit of providing shelter). • A 2016 study by the Oregon Center for Public Policy found that almost half of Oregon renters are cost burdened (meaning that 30% or more of income is put towards housing costs); communities of color are disproportionately affected by lack of affordable housing. • Research suggests benefits of affordable housing in three areas: education, health and economy. • Benefits stem from reductions in involuntary mobility, reductions in exposure to environmental hazards, and investments in local communities (among other areas).

Impact of Affordable Housing on Education • Benefits of affordable housing on education stem principally from reductions in involuntary mobility (i.e. involuntary, unplanned or frequent moves). • A substantial body of research has linked (involuntary) mobility with decreased school performance, increased drop out rates, and increased behavior problems at school (including increased suspensions or expulsions). • Access to well maintained/managed affordable housing can decrease exposure to hazards that may cause illnesses such as lead poisoning or asthma that impair learning and school performance.

Impact of Affordable Housing on Health • Living in a well managed/maintained affordable housing unit can limit exposure to environmental hazards, such as allergens, neurotoxins, and other dangers • Reduced housing costs are associated with increased spending on food and healthcare • A study by the Center for Housing Policy reported that households that spend more than half their income on housing spend only 4.2% of their income on healthcare and insurance compared with the 9% allocated by households that spend less than thirty percent of their income on housing • Access to a stable place to live may have other benefits • Reduced stress and improved mental health • Increased ability to manage chronic illnesses such as HIV/AIDS • Improvement in school performance among kids who were formerly homeless or at risk of homelessness

Impact of Affordable Housing on the Economy • Benefits of affordable housing to the economy primarily stem from direct expenditures on affordable housing by developers, which can stimulate local economies as workers are hired and construction materials purchased • Housing security is linked to factors that support job stability; research shows a higher risk of job loss among those who experience involuntary mobility • Suggestion that affordable housing lowers property values is not firmly supported by research. A meta analysis found that: • “Well-maintained affordable housing development[s]… can raise property values in neighborhoods, such as those that contain abandoned homes and neglected or physically deteriorating properties.” • Some evidence suggests that affordable housing combined with social services may help to save taxpayer money by reducing the utilization of public services by chronically homeless individuals

Methodology for Analyzing Cost Drivers for Affordable Housing Projects • Collected data from multiple sources • OHCS electronic and paper files (including final cost certification reports submitted by developers) • Developer surveys • Publicly available information, such as construction cost index, census data, wage rates and unemployment rates • Constructed a dataset for analysis • New construction projects (4% and 9% LIHTC, HOME projects) • Placed in service between 2000 and 2018 • Dataset includes 172 new construction projects placed in service from 2000 through 2018; of these, usable survey responses were received for 123 projects (72%) • Evaluated cost drivers’ impact on total development cost (net of land) • Separately evaluated land costs across projects

Projects Span the State Project with Survey Response Project without Survey Response

Development Cost per Unit in 2019 Dollars • Cost per unit ranged from just over $100K to just under $400K with an average of $226K

Cost per Unit by Year • Cost per unit (adjusted for inflation) has increased from $162K in 2004 to $249K by 2017 • The RSMeans Construction Cost Index generally tracks these changes and indicates additional cost increases since 2017

Components of Development Cost • Construction costs are the largest component representing 68% of development costs net of land

Components of Development Cost (cont.) • Real development costs increased on average 2.7% annually during the study period • Permits/System Development Charges have more than tripled during the same period (8.9% annual growth)

Regression Analysis Methodology • Multiple factors act simultaneously to influence costs, complicating analysis based on simple averages or trends • Using a regression analysis allows us to examine the independent relationship between potential cost drivers and various cost measures • Regression can isolate the independent effect of one factor (e.g. economies of scale, project location, etc.) on project costs while holding constant other factors

Regression Results: Project Characteristics • Taller Buildings Cost More • Projects with 4 or more stories were nearly 7% more expensive per unit to construct relative to projects with 3 or fewer stories • Prevailing Wages Add to Cost • Just over half the projects in our analysis (52%) paid prevailing wages (BOLI or Davis-Bacon) • Holding all other factors constant, projects that paid prevailing wages cost 9% more per unit than those that did not pay prevailing wages

Regression Results: Local Factors • Labor Market Conditions Affect Cost • The county unemployment rate is negatively correlated with costs and statistically significant: for every 1 percentage point increase in the unemployment rate the cost per unit decreases by 5% • More Community Meetings Associated with Higher Cost • The number of community meetings can act as a proxy for the extent of community opposition to a project • Projects with 4 or more community meetings were more expensive on average to construct, costing 8% more per unit

Regression Results: Economies of Scale • Economic theory suggests that as the size of a project increases, the cost per unit will decline as some fixed costs remain constant • Our analysis confirms that larger projects are less expensive per unit • For each 10% increase in the number of units, the cost per unit decreases by 0.9%, all other things equal • For example: if the number of units in a typical project increased by 10%, from 42 to 46 units, the cost per unit would fall by about $2,000, from $241,000 to $239,000

Findings: Quality Measures • We measured building quality and durability across 6 measures: • Roofing quality/warranty period • Quality and durability of exterior finishes • Quality and durability of windows • Quality and durability of floor finishes • Bathroom durability and finishes • Kitchen durability and finishes • The average reported overall quality measure was 2.2 based on a 3-point scale (1 – Low, 2 – Medium, 3 – High) • Our results suggest that higher levels of building quality and durability are associated with higher construction costs • Specifically, a 10 percent increase in the overall quality measure (e.g. from 2.0 to 2.2) is correlated with a 2% increase in cost per unit • For a typical unit, this translates to approximately $4,600 in higher costs • Note that these results reflect just the impact on initial development costs, and are not a lifecycle analysis of costs over the life of the structure

Other Factors We Examined • In addition to the findings presented here, numerous additional potential cost factors were analyzed but were not found to be statistically significant: • Project duration or Winter start (time from construction start to placed in service date or start during a winter month) • Developer characteristics including developer type (For-profit vs. Nonprofit), size (number of employees) or experience (number of previous projects) • Local government density maximums and design requirements • Local hiring requirements • Certain location characteristics, such as population density and household income of the census tract where the project was built • Whether the project had a land use appeal before LUBA • Note that the likelihood of identifying a statistically significant relationship increases as the number of projects available for analysis increases; therefore the lack of a statistically significant relationship here may be the result of limited available data

Land Costs • Only projects for which land costs were available and the land was acquired via an arms-length transaction were analyzed (69 of the 123 projects used in the regression analysis) • Land costs are an important part of the total cost to develop affordable housing, accounting for just under 7% of total project costs on average • Land costs varied widely across projects when measured on a cost per acre basis, and were higher in low income areas • Land costs per unit were more consistent across projects

Land Costs: Variation by Income Level • Land costs were considerably higher for projects located in low income areas relative to high income areas • This indicates that projects built in low-income areas are also in densely populated areas, where higher land costs increase total project costs

Land Costs: Measures of Cost • When comparing projects in rural vs. non-rural areas: • Non-rural projects had much higher land costs per acre • Non-rural and rural projects had similar land costs per unit and as a share of total costs

Land Costs: Higher Costs Result in Taller Buildings • Projects with fewer than 4 stories had land costs that averaged $300K or less per acre, while land costs for projects with 5 or 6 stories averaged $2.4M and $6.2M per acre, respectively

Market Rate Comparison • Limited data are available for estimating market rate project costs • RSMeans is a commercial construction cost estimating software tool • We estimated market rate construction costs using RSMeans and compared the results to actual construction costs for comparable affordable projects in our dataset

Market Rate Comparison (cont.) • Results from 35 sample projects indicate that construction costs for affordable projects fall on average between “Low” and “High” market rate cost estimates from RSMeans *Affordable project costs have been converted to real (2019) dollars using RS Means National Cost Index

Key Findings • Key findings from our research • Projects with more units cost less per unit to develop • Projects with larger units or more stories cost more • More durable and higher quality projects cost more to build • Local community opposition is associated with higher costs • Local economic conditions affect costs • Prevailing wages add to costs • Land costs per acre are higher in low-income areas • Land costs per acre are also much higher in non-rural areas, but are comparable across rural and non-rural areas in terms of cost per unit and as a share of total project costs • Costs for permits and SDCs have increased at much higher rates than overall costs (8.9 vs. 2.7 percent annually since 2000) • Limited available data suggests that development costs for affordable and market rate projects are (roughly) comparable

Affordable Housing Cost Study: Summary of Findings