Rising costs of construction are a big barrier for Hochul's housing plan

Gov. Kathy Hochul's proposal to address a genuine crisis in housing stock has a looming issue even more serious than her ill-advised suggestion to override local zoning: construction costs.

COVID-19’s long shadow has profoundly altered the economics of construction. Every previous financial metric for building multifamily residences is a distant memory. One traditional formula estimated building costs for multifamily residential at $260 per square foot. Now developers need to consider as much as $500 per square foot as a baseline. Concrete that was $110 a yard can now cost $190 a yard. Wood framing has become a commodity that is anyone’s guess when you go to contract.

While costly, material is just part of the construction equation.

The cost of labor is reaching historic highs. It reflects the national scarcity of construction workers whose skills are easily transferrable to other parts of the country. Not surprisingly, they are following the money to regions where construction approvals from local municipalities are easy to obtain and where population shifts have created enormous demand for affordable housing. Industry analysts report a national shortage of at least a half-million skilled construction workers, driving up wages among union and nonunion workers alike.

Local developers and construction companies acknowledge that electricians, carpenters, and plumbers will travel east to the Hamptons to find far more lucrative paychecks than from projects in Patchogue or Melville.

Government mandated costs also increase the burden on the bottom line. Current residential housing approvals often come with myriad state requirements. For example, required LEED (Leadership in Energy and Environmental Design) certification that introduces energy conservation technology often insists on the most costly alternatives, like Energy Star appliances and extra insulation above and beyond state code. Additional proposed mandates, such as phasing out natural gas boilers and appliances, would push project costs even higher.

Washington also plays a role in determining the viability of housing starts through its monetary policy. Current Federal Reserve interest rate hikes are having a direct impact on borrowing costs for construction.

All of these factors impact the final cost of a project and what the prospective tenant will pay in monthly rent or carrying chargers for a co-op apartment, fracturing the traditional definition of “affordable.”

That begs an even larger question. What investors or financial institutions will view these projects as viable investments in “affordable housing” when construction costs mock the very concept? Without government incentives, such as phased-in taxes offered by industrial development agencies, there is no financial model that would allow developers to spend the tens of millions of dollars required to break ground; one project in Patchogue my company looked at recently cost $11 million for just 21 units.

An additional red flag for the private sector is the current Albany debate over “Good Cause Eviction.” If enacted, it would allow automatic lease renewals for most tenants in apartments not currently under rent control. It would require landlords to justify any rent increases over 3%, virtually guaranteeing commercial lenders will redirect their dollars to anywhere but “affordable housing,” for they will never see an adequate return on their investment.

The governor’s housing initiative is at a crossroads where public policy meets private sector reality. While much attention has been placed on home rule and the loss of zoning authority, this effort to build housing for a new generation of Long Islanders will succeed or fail based on supply, demand, the cost of money, and whether government has given the private sector the confidence to actually build the future.

This guest essay reflects the views of Peter Cosentino Sr., president and founder of Cosentino Realty Group in Commack.