It’s Expensive to Build in Austin, and Regulations Are Adding Cost

Costs associated with regulation – like flood controls – are greater for multifamily housing than single-family housing, likely due the pervasiveness of low-density zoning in Austin's land development code. Those regulatory costs also vary across town. This map provides an estimation of the overall potential regulatory costs a multifamily development could incur broken down by zip code. The researchers used an aggregate of all possible sites within each zip code and used a variable cost methodology, described in detail in their report, to apply estimates of potential regulatory costs. (map via City of Austin)

Since at least 2017, reducing the cost of housing has been a top priority for the city. But in a hot real estate market with rising construction costs nationwide, what power does local government really have to do that? Two newly published reports tackle that question and find that reducing the cost burden of fees and building regulations is a crucial step.

The reports on the costs of producing housing in Austin show that a single-family (SF) home in Central or West Austin is the most expensive type of housing to build in the city on a cost-per-unit basis. The high cost of SF development in Central and West Austin stems from land and construction costs, which can amount to about 80% of total cost in a residential development. Land is more expensive in Central and West Austin, but the reports also found that the regulatory fees imposed on developments in these parts of town – including tree care requirements, flood controls, environmental protections, and rezoning costs – can make or break projects and disincentivize multifamily developments. (Researchers emphasize in the report that they did not consider the environmental benefit of these regulations – just the costs they add.)

The researchers who wrote the report note that building more multifamily housing throughout the city, but especially in areas where it has historically been restricted, plays an important role in achieving housing goals laid out in the city's 2017 Strategic Housing Blueprint. The blueprint says Austin needs to produce 135,000 new housing units by 2027 to maintain "sustainable growth" in the city; when the report was written, the city had only produced about 64% of the housing needed to stay on track toward achieving the 10-year goal.

The fact that land and construction represent the largest cost drivers in development is unsurprising and unlikely to change in the near future, so long as Austin remains a desirable place to live and the price of labor and materials needed for construction continue to rise. These factors are largely beyond the control of local government. The fees and regulatory requirements imposed by the city – even if they only represent a fraction of a project's overall cost – are among the few costs city government can control and are thus important to calibrate in a way that provides effective regulatory protection without stifling housing production too much.

"These results highlight both the importan[ce] of multifamily housing and the precarity of the multifamily development process," the authors of the first report write. And because the overall costs of producing multi­family housing are so high, and because they are mostly tied to less mutable land and construction costs, "small additional costs can greatly impact the feasibility of a housing development," the researchers write.

But developers we talked to questioned the accuracy of construction cost estimates the researchers used to generate their cost figures, which estimate the cost per square foot is $111.17 for SF developments and $179.72 for midsized multifamily developments (around eight units). Elle Allen, who works in land acquisition at the Wolfe Firm and serves on the board of the Austin Infill Coalition, told us that for SF development, she's seeing construction costs twice those estimated by the researchers, while 10-unit townhome projects can cost around $190-$200 per square foot. Accurate construction cost estimates are important for local policymakers to consider, because they could influence how much subsidization is offered to developers in the form of bond dollars, tax breaks, or fee waivers, and they could also influence how much income-restricted housing developers are required to build to access those subsidies.

One common theme in each report is the cost of bureaucracy – specifically, the added costs of navigating the city's permitting process, archaic Land Development Code, and construction inspection process. Interviews researchers conducted with developers emphasized that these bureaucratic hurdles often cause delays in bringing housing projects online, which means property owners are carrying the costs of ownership without generating revenue to offset those costs, creating barriers to building more housing. The researchers note that pinning down the precise cost of administrative delays is difficult, but that "added time means added costs," and that "those costs are passed on" to the people in need of housing.

The two studies, which were conducted in the spring and fall of 2022 by teams at UT's LBJ School of Public Affairs and city staff, are the result of a resolution adopted by City Council in December 2021, when the pandemic surge in Austin's housing market was peaking. Already, the city is working to implement some of the recommendations offered by the researchers, including both reforms to the LDC that could ease the cost burden of expensive land in Austin and improvements to operations at departments that are involved in permitting review to make the processes more efficient.

Introduced by Council Member Natasha Harper-Madison, the idea behind initiating the research was to identify what costs relating to housing production were under the city's control and how they could be reduced.