A Treatise On Affordable Housing
November 26, 2023
At the risk of over-simplifying, it unfortunately needs to be said, that the key to affordable housing is to lower the actual cost of constructing housing. If we care about this issue, which I believe is truly a social imperative, then we need to address the root cause of it. Well intentioned policies that increase the costs on a developer’s proforma or cost more to build will have the opposite effect just like rent control and other initiatives have demonstrated. Government subsidies distort the market by artificially lowering rents without addressing the key driver, which is the cost to supply housing and further exacerbates the issue over the long run. Investments in new technologies, delivery methods, and reforming the permitting and entitlement processes are areas which directly lower the cost of the actual construction / development and should be prioritized. We think Colorado is leading in some of these areas, but not others. To solve this issue on a permanent basis the industry needs to fundamentally alter the economics of how we build and develop buildings. In this blog and the following articles I will articulate the three key points that I think can solve the problem on a long term basis. I summarize each of the three points below, but then will follow up with a more detailed analysis of each one in subsequent white papers.
- Vertical Delivery Method (VDM) – This method builds on the Integrated Project Delivery (IPD) and much of the work we were doing at Katerra. In our first principles analysis, only 47% of the actual construction cost was the direct labor, materials and equipment that go into the project. The rest of the costs are the layers of contractors, suppliers, project managers, duplicative markups, insurance, etc. So 53% of the cost was, in essence, the contracting / delivery method that the industry currently utilizes. Over emphasis on contracting / managing risk vs. efficiency has built up over the years to clog the system. RFI’s and submittals go through suppliers, field engineers, project engineers, architects, consultants, developer and back through the chain in a game of telephone that is truly laughable. On top of that if you track the material markups from the manufacturer to the distributor to the rep to the sub to the GC to the Developer the cumulative markup is 250% by our estimation. We believe the way to solve this is to truly vertically integrate the major trades with the GC, procure the materials direct from the manufacturer and design the project to a more detailed level similar to shop drawings. The completion of drawings to a higher level is something we found at Katerra was imperative for a vertically integrated company.
- Offsite Construction – For the right projects that do not need to maximize every Square Foot of site (i.e. Infill) there should be substantial savings from offsite manufacturing. Fading West, here in Colorado, and others nationwide are trying to adopt this new approach however the scale of both the factories and volume of projects to hit full absorption and achieve economies of scale need to increase dramatically. There are reasons these methods have not taken hold here in the US yet are prevalent in Europe. In addition to the volume, an adjustment of GC and field teams is required regarding contract delivery methods in order to deliver credits that more than offset the work done in the factory. This is a learning curve that, again, relies on volume to solve. The first projects will cost more, but the 5th one will be less as the contractors have more predictable on-site productivity. Cities need to adjust their permitting and inspection processes to allow for these and, I believe, in Colorado we have made good progress here.
- Reforming Government Administration – The permitting and inspection process needs to be completely reformed. If we landed a man on the moon in 1968 with the equivalent computing power of pocket calculators, we can figure out how to permit a multi-family project in a month. Any arguments to the contrary lack vision and leadership. The purpose of the building department and zoning is to facilitate more development not less. Zoning laws should also be loosened allowing more uses for each property. Any residual anti-Development sentiment needs to be replaced with the focus on delivering more supply to the market to reduce costs. Developers, Architects and Builders must also do their part to give the reviewers full and complete permit drawings to expedite reviews and take more liability for their design so the scope of what the building department reviews can be reduced. Finally review comments cannot feel subjective and there must be clear requirements with clear solutions offered. In person meetings in lieu of delayed back and forth email correspondence where confusion occurs need to happen so issue can be resolved timely and in person.
Over the coming months I will be outlining these three principles in more detail with more recommendations for each section. We also hope that several of these blogs and white papers will be co-authored with other industry professionals detailing and debating their strategy to have an industry led effort to reduce cost. We are excited for you to join us on this journey as an industry partner.