Thread by @CSElmendorf

"For a typical mid-rise apartment in San José, construction costs can exceed $700k–$900k per unit."

I 💯% agree w/ @MattMahanSJ that reducing construction costs should be a top priority for 2026 -- and that this is mainly a job for the state legislature.

🧵/22

https://twitter.com/MattMahanSJ/status/2005421551152443634

Reason #1. CA's fiscal constitution + local political incentives push local govs to extract "value" from development w/ impact fees, IZ & transfer taxes.

This drives up the cost of building enormously.

/2

The state leg should preempt most such fees, IZ, & taxes, ***and create a substitute source of local revenue.***

My preferred alternative: a state parcel tax assessed on the "net potential square feet" or "net potential units" created by upzoning pursuant to state law.

/3

Cities would be given a local option to reduce but not increase the tax.

/4

This would be functionally similar to a land-value tax assessed on the increment of value creating by state law, but it would sidestep Prop. 13 (b/c it's not assessed on value) as well as referendum-vote requirements for local taxes (b/c it's a state tax).

/5

The leg would need to pass it with a 2/3 vote. (Presumably the leg would exempt owners of SFHs.)

The tax would answer groups that insist on "value capture," while giving cities the revenue they need for infrastructure.

/6

Reason #2: The state has passed or strengthened numerous laws in recent years that both create development potential AND make it costly to build (AB 2011, SB 79, SB 423, housing element law).

/7

The costs are imposed through requirements that developers pay way-above-market wages, and/or set aside a substantial share of the new units as money-losing and hard-to-manage "deed-redistricted affordable housing."

/8

Happily, the Leg in 2025 came up with a much more economically feasible labor compromise for the CEQA reforms.

In 2026, the Leg should roll that compromise into AB 2011 and SB 423.

/9

As for the BMR mandates in state law: the Leg should repeal them all, and instead use a portion of the new parcel tax revenue to purchase units or deed restrictions via a reverse Vickrey's auction.

/10

The state would establish a formula for the housing services a dwelling provides (taking into account location, size, etc.), and developers would compete through the auction to sell housing services to the state at the lowest cost.

/11

Or, in lieu of buying BMR units, the state could use its share of parcel tax revenue to supplement the federal Housing Choice Voucher program.

/12

The voucher approach is probably superior to buying BMR units (not dependent on a housing-services formula, better incentives for building maintenance), but it would be a bigger conceptual break with the "let's make more BMR units" tradition and so might be harder to enact.

/13

Reason #3: Construction costs are determined in significant part by state building codes.

CA passed a stopgap "no new code requirements for 5 years" measure in 2025.

But freezing the code doesn't do anything to fix existing rules that wouldn't pass a cost-ben test.

/14

The Leg should revisit how state code requirements (and local code amendments) are made, requiring cost-benefit analysis.

Then audit the existing code and strip away rules that don't pass the test.

/15

(In 2024, @CAgovernor directed @California_HCD to identify code reforms to lower cost of building infill housing. Has anything come of this? Not to my knowledge. I'm not sure HCD has the capacity to do it--no builders or economists on staff.)



/16

https://x.com/CSElmendorf/status/1818754922487431428

Reason #5: Private incentives to invest in construction R&D are increasing in firm/project size.

No one city can do much about this, but the state has leverage.

/17
nber.org/papers/w33188

E.g., by upzoning & requiring ministerial review, it reduces incentive for firms to invest in local politics rather than R&D.

And by establishing a state permitting regime for large projects, it could spur construction-tech agglomerations.

/18
latimes.com/opinion/story/…

The state could also offer monetary prizes for new production processes or technologies that demonstrably reduce the cost of construction.

/19

Reason #6: the "post-construction" costs of a housing project are determined in significant part through state law. E.g.,
- construction defect liability
- fire insurance
- energy costs

/20

And the big local drivers of post-construction cost & risk, like new tenant protections and transfer taxes, are things that the state could control and standardize.

(The politics of doing so are probably easier at the state than at the local level.)

/21

In sum, it's great that local leaders like @MattMahanSJ and @DanielLurie are trying to reduce the cost of of building, and there's much they can accomplish, but the biggest bangs will have to be delivered through state law.

/end