Many cities across the nation are feeling the pressure of inadequate affordable housing. If in high demand, then why is new urban construction not popping up on every street corner? The reason is the tremendous cost that developers are faced with and the uncertainty of making a profit from low rent.
The source of money for developers often comes in the form of loans, taken out long before rent ever comes in. A loan is only granted to a developer if they can expect to bring in enough revenue to pay back the loan. The cost of development is often greater than expected revenue, thus keeping the affordable housing crisis ongoing.
A developer has many costs upfront including the cost of land, cost of construction, and developer fees.
The cost of land is many times out of the control of the land developer with the exception of the use of public land in some cases. Finding land is also one of the biggest problems. Some developers who traditionally build new housing have shifted strategies to acquire existing and rehabilitate properties.
Construction costs are largely determined by the market and every project is unique. Affordable housing still requires the same quality materials and design as any other type of market-rate housing. The number of units, design aspects, complexity of the building project, and labor and materials are all factors when it comes to construction costs, among multiple other factors.
Developer fees include all business operational expenses such as hiring employees, office expenses, and more.
Other costs not mentioned above include design fees, interest from loans, financing fees, and project management fees.
Government subsidies, tax credits, zoning bonuses, and other affordable housing programs do help with the initial costs for urban housing developers, but for many the risk of not being able to pay down their debt because of low revenue from affordable rent is not an option.