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San Francisco Multifamily Developers Go Small, Think Prefab To Combat Rising Construction Costs

With construction costs rising at a steady pace and rents slowing down, multifamily developers in San Francisco are reconsidering how they build their new projects.

Lubin Olson partner Alexander Pugh, Polaris Pacific partner Paul Zeger, Lendelease Vice President and Project Executive Nori Mizushima, Sternberg Benjamin Architects Inc. President David Sternberg, Build Inc. Vice President of Development Katie O'Brien and Sares Regis Group of Northern California Senior Vice President Ken Busch

“Construction costs have increased significantly. We haven’t seen significant leveling off,” Lendlease Vice President and Project Executive Nori Mizushima said during a recent Bisnow event in San Francisco.

Material costs, labor costs and demand for subcontractors has led to an impact on costs and productivity, she said.

Prefab and modular units are piquing the interest of multifamily developers because they can speed up the construction timeline and cost less than a traditional build. Residents also are changing their perception of prefab units. Once the housing is done and in the ground, there is almost no indication that the unit is modular, Greystar Managing Director Brian Gagan said. The units are double-walled around every unit to control sound between the units.

Tech companies, like Google and Facebook, are becoming more supportive of modular as well. Facebook’s new community has half traditional housing and half modular, HKS Senior Vice President and principal Brendan Dunnigan said. These companies are realizing they cannot house employees in the Bay Area and risk employees moving elsewhere.

Swinerton Builders is working on two projects at Turk and Levenworth from Forge Land Co. that will have steel skeleton walls and floor panels with pre-wired connectivity. These kits of parts will take half to two-thirds of the regular construction schedule, Swinerton Builders Division Manager Terry McKellips said.

DCI Engineers principal Jeff Brink, HKS Senior Vice President and principal Brendan Dunnigan, Build Group Director of Presconstruction Brian Davey, Grestar Managing Director Brian Gagan and Fisher Chief Operating Officer Tom Perko

Sternberg Benjamin Architects worked with Zeta Communities on one of the first modular buildings in San Francisco, according to Sternberg Benjamin Architects President David Sternberg. Zeta Communities, which went out of business in 2016, delivered 10 to 12 modular units a day using two to three different trucking companies. He said the only problem with that method is if any of those trucks got into an accident, it could create complications.

The units came completely painted and with finished appliances with the utility connections running through the back-corridor wall. On-site crews had to plug each unit into the wall. Sternberg said his firm did the shell design of the building.

While prefab concepts are becoming increasingly popular within the industry, there is still much to understand about what works and what does not work for trade industries. HKS is working on a study of prefab systems to understand what is sustainable and why companies using prefab failed in the past, according to Dunnigan.

Developers Rethink Residential Unit Size

Herczeg Tobias Architects co-founder Jake Herczeg, AISC structural steel specialist Kristy Davis, Swinerton Builders Division Manager Terry McKellips, City Ventures Senior Vice President, Northern California Patrick Hendry, Grosvenor Americas Senior Vice President Steve Buster and MacFarlane Development Co. Managing Director and President Dirk Hallemeier

Developers also are keeping costs down by going smaller. Greystar’s Gagan said the square footage of units has shrunk an average of 100 SF over the last three to four years. Many studios and one-bedroom units are in the 400 SF to 500 SF range. Studios and one-bedroom apartments are moving quickly while two-bedrooms have moved backward. Going too small could be difficult because units that are 250 SF may not be in demand in 10 years, he said.

The small units are getting closer to transit and often have neighborhood amenities like retail and restaurants, Polaris Pacific partner Paul Zeger said. Comparatively, large expensive ultra-luxury residences are getting bigger and more luxurious since there are people willing to pay a premium.

Build Inc. Vice President of Development Katie O’Brien said two-bedroom units also are going quickly because more residents are entering roommate situations as a way to pay less rent. With roommate situations becoming more popular, she said three-bedrooms are not as risky as they used to be.

Developers also are pushing for higher-density projects in great locations.

Grosvenor Americas is working on a 44-unit boutique condo complex on Powell and California that is an exceptional location, Grosvenor Americas Senior Vice President Steve Buster said. The company bought the land in 2014 and entitled the project in 2016. Costs have gone up 65%, but there has been enough price appreciation to get some of that back — margins are just lower than expected.

What also is important for this project and others is finding a location that gives developers a competitive advantage, he said. The developer also is working on a condo project in Jackson Square, a largely retail neighborhood with few multifamily buildings.

“We have to embrace density here,” Buster said. “The time of the big detached homes is over. Cities need to embrace higher-density projects.”