The dilemma: Developers jostle with housing headwinds

The spike in insurance rates, tied with land costs and the chokehold on supplies, has developers scratching their heads on how to push residential projects forward. It’s even a steeper hill to climb when attempting to build affordable and workforce housing.

During the St. Petersburg Area Chamber of Commerce’s Economics of Building Multi-family Housing event Friday inside the AC Hotel, real estate experts acknowledged the affordable housing crisis and how the bottom line is affected.

Participants included Jimmy Chestnut, regional VP at RPM Living, which has invested in student housing in Tampa; Denise Kelly, development manager at Stoneweg, which is working on the Lake Maggiore Apartments project and redevelopment of the Coquina Key Plaza; and J Square President Jay Miller, who has worked on several local retail projects, including the new Whole Foods Market.

“Over the past couple of years, rents have increased by 20-25% in the local market. Historically, that’s typical, but not this early in the cycle,” commented Miller, the event moderator. 

The higher rents can be attributed to the increase in property values, utilities, taxes, insurance and other factors that require a project to reach a certain threshold to be viable. 

“We see the inflation of interest rates, which has really impacted the developer’s ability to make it work on top of the construction costs,” Chestnut said. “We saw lumber [prices] come down a little bit, but nothing is returning to pre-pandemic levels, and with interest rates and insurance rising, that’s an even larger impact on the operation side of the business.” 

He recalled insurance rates costing $400 to $500 per unit. The renewal has jumped to $1,500-$2,000 per unit. 

“The insurance costs are killing deals right now,” Kelly said.

There are two components of insurance in the building industry – insurance for the construction, as accidents/unexpected events may occur affecting the project, and property insurance for the completed development. 

“Either rents need to go up to compensate for that or other costs need to come down,” Miller said. 

Kelly showed an example of a real project in a different market that failed to move forward due to a gap in funding. 

The unnamed Stoneweg project, which was outside of the Tampa-St. Petersburg metro, would cost $132.1 million.

The price per unit build would be $380,691, which encompasses all of the related soft and hard costs. 

“That crushed the deal because in this particular market, we could’ve bought another project that was already built for less than,” Kelly said. “Why take on the risks of new construction, the time, volatility of the market, supply chain issues and instability?”

The panelists left to right: Eric Garduno, government affairs director of the Bay Area Apartment Association, which sponsored the event; Denise Kelly, development manager at Stoneweg; Jimmy Chestnut, regional VP at RPM Living; and J Square President Jay Miller. Photo by Veronica Brezina. 

The team needed to raise $57.42 million of equity, and tried to accomplish that goal by working with private investors and through other sources.

“We have debts within our company – one is for raising debt, another is for raising equity,” Kelly said. “My role is creating intuitional and private partnerships where we can mitigate the project cost with land deals. There are a lot of moving parts.” 

Today, real estate firms are generally looking for a minimum of a 6.5% NOI (net operating income), which is the income generated by a project that defines the needed equity for a project. 

The NOI is determined by subtracting all operating expenses on the property from all the revenue generated from the property. The higher the revenues and the smaller the expenses, the more profitable a property is, according to finance publication Investopedia. 

Developers often secure loans at lower percentages; however, the tightened regulations have constrained the amounts. Stoneweg was previously able to borrow as much as 80%. Banks have slashed the percentage to 50%, Kelly said. 

She illustrated four different hypothetical local housing project scenarios. 

In one example of a Skyway Marina District garden-style apartment project, it would likely cost a developer $250,000 to build each unit.

Kelly based the estimate to the new Sur Club Apartments built in the district. 

Land acquisition would be $1.3 million per acre. There would be a 6% interest rate, and property insurance would be roughly $1,500 per unit.

While the data presented was based on market-rate units, the panelists said regardless of the apartment type, the steep price of construction per unit, land acquisition costs, and hiked insurance rates would remain. 

However, by having affordable/workforce housing, the rental prices would dip – shedding revenue and commonly making the project less feasible. 

Several solutions to help offset the costs of building affordable housing: 

• Density bonuses and the newly passed Live Local Act, which increases affordable housing funding and simultaneously strips regulatory powers from city and county governments. It authorizes any multifamily and mixed-use developments in commercial, industrial or mixed zoning areas if 40% of the residential units are affordable for 30 years.
• Sponsored workforce housing: This can be accomplished through partnerships between developers and employers. 
• Expedited upzoning: This allows for changes in a zoning code to increase a project’s capacity and density. 
• Reduced impact fees: Developers pay these fees, which go towards backing local transportation infrastructure projects. 
• Land bank/disposition programs: This is a scenario where the government contributes land. 
• Tax-based incentives: One example is the Low-Income Housing Tax Credit, which provides a tax incentive to build or renovate affordable rental housing for low-income residents. 

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