Could Bay Area home building be a COVID long-hauler?

COVID-19 spun up the perfect storm to batter the anemic pace of Bay Area home building in 2020. The health crisis slowed government responses, made construction materials and workers scarce, and added costly health and safety measures to projects.

And the future looks bleak. Home production is expected to stall, and developers say new homes are likely to take longer and cost more in a region spiraling deeper into a housing shortage.

Residential permits for new homes and apartments in the Bay Area plummeted 26% from 2019 to 2020, another shock to the home-starved region where demand has outstripped supply and home prices have risen steadily for nearly a decade. The ripples from the pandemic have already reduced new construction and driven up prices an estimated 20% — a trend developers say could continue in coming years.

“This year is bad. Next year is going to be even worse,” said Matt Regan, senior vice president of public policy for the Bay Area Council. Residential developers have told Regan “the pipeline is getting narrower and narrower” for smaller projects that provide most of the new housing in the region.

City employees worked remotely during the crisis, slowing local government decisions on new projects. Developers hunted for building officials at shuttered city halls, hoarded personal cellphone numbers for key city personnel, and filled days and nights with Zoom meetings to improvise and keep construction on track.

Material costs soared — driven by shipping slowdowns from Asia, but also from leaps in lumber prices and shortages in appliances, windows and electrical hardware. Projects that looked financially sound in February 2020 are no longer viable, developers say.

High-end homes have become the only feasible, unsubsidized development in most cities, developers say. Demand remained strong, and builders pushed projects toward completion.

But Josh Santos, executive committee chair of the Bay Area Building Industry Association, said prices cannot keep rising without losing buyers. “At some point,” he said, “you start hitting pricing ceilings.”

Most Bay Area counties saw dramatic declines in the development of new homes and apartments, according to data from the Construction Industry Research Board. Residential permits fell 29% in Santa Clara County, 37% in Alameda County, 36% in San Mateo County, and 34% in San Francisco. By comparison, Contra Costa County construction held steady, dipping just 1% from a year earlier.

Joe Sanchez, research director at CIRB, said construction around the state has begun to pick up in recent months. A full picture of the COVID pandemic’s impact on building since the initial shutdown in March 2020 is expected at the end of the month.

But it’s clear already that home building plummeted. No new permits for apartments were issued in Santa Clara County in May 2020,  a collapse typically seen only after natural disasters like the Camp Fire that decimated Paradise, Sanchez said.

Developers said the pandemic shock felt like the crash of the home mortgage market in 2008, which led to a prolonged recession.

Santos, a Landsea Homes executive, said new challenges popped up regularly as the company built 200 homes in communities in Santa Clara, Danville and Newark.

One city couldn’t accept electronic fund transfers for building permits. “You would think giving people money would be the simplest part of the process,” said Santos.

A Landsea Homes manager had to arrange a parking lot meet-up to hand off a $400,000 check to a city employee to finish the transaction. “Almost like it was some underground, covert mission,” Santos said.

Inspections have been delayed, despite some agencies adapting to live video reviews of projects.

Counties and cities have different worksite rules, forcing developers to learn new guidelines and design individual work schedules and procedures for each project. “You almost have to have 10 SWAT teams,” said Jeff Frankel, division president of Tri Pointe Homes Bay Area.

He estimates Tri Pointe residential projects totaling more than 300 homes in the Bay Area were pushed back at least six months, a figure echoed by other homebuilders.

“The more complicated the project, the more delays there have been,” Frankel said. “There just seemed to be more roadblocks.”

The shutdown of many government buildings also strained the typical back-and-forth, collaborative process between developers and city building officials. Problems once solved in a one-hour sit-down have sometimes taken weeks to iron out over email and Zoom.

Jon Tattersall, president of Thomas James Homes in Redwood City, said demand for new homes, especially those starting around $1.8 million, has been strong as families with two tech professionals have felt less economic pain from the pandemic.

But building even those homes has been a challenge, he said. For one project, Tattersall drove to Menlo Park City Hall and knocked on windows to get the attention of city workers so he could move permits and inspections along. “I was just banging on the window until someone would come to the door,” he said.

Construction sites have also changed, with fewer workers on-site to limit exposure to the coronavirus. Additional safety staff and monitoring, required by the state, have added some costs to projects.

Although developers remain optimistic about the demand for new homes in coming years, some fear rising costs will threaten projects and further slow construction next year. Construction delays have added costs to planned developments and may sink projects once thought to be shovel-ready.

Santos said Landsea is trying to redesign and save a new project with preliminary approval in San Benito County. As a mentor told him, he said, “Time kills deals.”

Regan said the state needs to treat the housing shortage as an emergency in light of the pandemic. Rising new home costs will put an additional burden on middle-class workers outside of high-paying tech and other professional service jobs.

“It’s a gated country club for rich people,” he said. “It’s just not sustainable.”

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