Market and Feasibility Implications for Affordable and Higher-Density Market Rate Housing

There are several factors affecting housing market feasibility; however, many of these may be temporary or subject to change.  On the supply side, a shortage of labor (particularly skilled labor), as well as a reduced or delayed availability of building materials slows construction.  The labor and materials shortage drives development and project feasibility costs. One other notable factor may be the limited market for multi-family ownership units (e.g., condominiums) in the valley given other ownership options such as single-family homes and planned-unit developments. At the same time, demand for higher-density development is increasing due to a variety of factors, including:

  • Sustainable Community Strategies (SCS) and Regional Transportation Plans (RTP) implementation
  • Land conservation for agricultural use and habitat preservation and the associated mitigation costs if they are not
  • Cost of extending/providing infrastructure
  • Related urban development and urban growth boundaries
  • Higher residential densities to satisfy very low- and low-income RHNA allocation.

As a result of these changes, jurisdictions are beginning to refocus housing development inwards toward downtowns, neighborhood and community centers, and transit-served areas.   

Higher-density and affordable housing development depends on several factors but essentially comes down to demand and financial feasibility.  Assuming there is a demand [we know there is for affordable housing] project financial feasibility remains the key factor.  Developers typically prepare a pro forma to test financial feasibility.  The pro forma considers hard costs such as building, infrastructure, and landscaping construction (e.g., materials and labor), and soft costs including design, engineering, taxes, insurance, permitting, and impact fees, as well as land costs, and then compares those costs to anticipated project revenues (e.g., sale price/rents, and a rate of return for the developer and any investors). The return rate is typically based on a risk assessment (e.g., approval likelihood, time frame).  A development project is considered financially feasible when it generates a sufficient return rate for the developer and investors and when there is a fair value for the landowner.  As such, jurisdictions can support project feasibility by providing certainty in project review schedules/timelines, and when feasible, assisting timely infrastructure improvements.  

Support for higher-density development:  The marketplace is beginning to support higher-density developments, particularly in metropolitan areas, as evidenced in a recent HUD study (link below) that evaluated the Fresno County housing market area. The study found a strong economy with non-farm payrolls increasing by an average of 3.1 percent annually since 2011; a balanced sales market with a low ownership vacancy rate of 1.5 percent; and a slightly tight rental market/apartment vacancy rate of 2.4 percent. The study also forecasted a demand of 2,625 rental units through 2023, noting 1,075 units under construction that would satisfy a part [~41 percent] of the forecast demand.  A March 2021 article in the Los Angeles Times (link below) supports the study’s findings, noting the robust demand for rental housing with rents rivaling those in the Los Angeles area.  

Another September 2021 article in the Modesto Bee (link below) compares the differing approaches to housing development in Modesto and Manteca. The article finds that Manteca with its pro-development stance has weathered far better during economic downturns and the Covid pandemic than Modesto, despite its much larger size.  The article notes that the Modesto development review process takes much longer and is less supportive than neighboring communities, making development generally less attractive to developers. This indicates permit streamlining and city support is relevant in overall market feasibility.

In March 2020, the Terner Center for Housing Innovation published a report on the costs of affordable housing production relating to California’s 9 percent Low-Income Housing Tax Credit (LIHTC) Program (link below).  The report concludes that the costs on 9 percent LIHTC new construction projects have significantly outpaced inflation, meaning more public subsidy dollars are building fewer and fewer affordable units.  The study notes that costs [not unique to affordable housing] are related to a tight labor market and challenges in gaining entitlements for multi-family projects. The study also notes that most zoning accommodates single-family homes, making it difficult to build a more balanced mix of units affordable to all income levels.  Finally, the study concludes that expanded State funding for affordable housing will help, but the State should lead system reform to get the best return for dollars invested. This study also demonstrates the need for jurisdictions to zone for multi-family developments. 

Also in March 2020, the Terner Center for Housing Innovation published another report: “The Hard Costs of Construction: Recent Trends in Labor and Materials Costs for Apartment Buildings in California” (link below) noting that rising construction costs are undercutting housing affordability and viability overall. The study also found that the State has several tools that could help mitigate construction costs, including building regulations and codes (possibly supporting new construction techniques): streamlining permitting approval processes; providing support for training and apprenticeship programs to address labor challenges, and evaluating affordable housing financing to promote more cost-efficient construction.  

Survey Results

Overall, stakeholders identified high construction costs, skilled labor shortages, few affordable housing developers, and additional incentives as important factors dampening housing production. More than 53 percent of interviewees identified public-private partnerships as the best tool for addressing housing supply and associated costs.  It was closely followed by 50 percent that found infill housing strategies to be the best tool. Innovative funding, financing, and capital investments (28.57 percent), promoting use of alternative housing types (25 percent) and allowing multiple housing units by-right (21.43 percent) rounded out the best tools.

Stakeholder Interviews

Stakeholders offered the following observations and recommendations:

Income and use mix. Mixed-income developments and mixed-use developments seem to be thriving better in the Valley. Mixing development with those with higher-income earners has been successful.

Incentivize density. Many State funding programs are going back to density thresholds and rolling back greenfield development. Because higher-density infill housing can be more expensive to build, local jurisdictions must provide incentives for it. 

Identify, plan, and incentivize priority sites. Find ways to incentivize infill plans and programs. Respondents cited Fresno COG’s plan, which enables developers to request funding for infrastructure improvements for high-density projects, as an example. If a priority infill site has been identified, find ways to encourage development. There should be a focus on transit station area planning around both bus and rail locations, either with conditional funding or incentives for both market-rate and affordable housing. The key is infrastructure planning and funding. Priority infill areas should be regionally identified and ranked for funding opportunities.

Ineffective density bonus. Respondents noted the Valley is not dense enough for density bonuses to work in many areas.  


U.S. Department of Housing and Urban Development, Office of Policy Development and Research, Comprehensive Housing Market Analysis, Fresno CA (January 2020)

Los Angeles Times. The Nation’s Hottest Housing Market? Surprise its Fresno. 

Modesto Bee. Modesto and Manteca’s Contrasting Approaches to Housing Development. 

Terner Center for Housing Innovation, UC Berkeley, The Costs of Affordable Housing Production: Insights from California’s 9 percent Low-Income Housing Tax Credit Program (March 2020).

San Francisco Planning Department, Housing Development Feasibility and Costs, White Paper. 

Terner Center for Housing Innovation, UC Berkeley, The Hard Costs of Construction: Recent Trends in Labor and Materials Costs for Apartment Buildings (March 2020)

California Department of Housing and Community Development, Uniform Multifamily Regulations (UMR) Financial Feasibility Analysis/Underwriting and Project Management and Operations for HCD loans and grants. 

Brookings, Policy 2020, To improve housing affordability, we need better alignment of zoning, taxes, and subsidies (January 7, 2020).

Urban Land Institute, Higher Density Development – Myth and Fact

Terner Center for Housing Innovation, UC Berkeley, Four Tools for Stimulating Economic Recovery Through New Homebuilding (June 2020)

Terner Center for Housing Innovation, UC. Berkeley, Revisiting California’s Density Bonus Law: Analysis of SB 1085 and AB 2345 (July 2020).