It’s hard to build housing right now.
There is a long list of reasons as to why, including the skyrocketing costs of materials, but the high cost of building has developers looking for ways to fund and start projects without breaking the bank.
Robbie Osenga, vice president of business development at Catalyst Construction and commercial real estate broker with Axis 360, showed WGLT a “recipe” of estimate costs for a newly constructed, single-family home and the costs associated with it.
While Catalyst does not build single-family homes, they have worked on multifamily units. Osenga said the higher costs are a consistent problem across the construction industry, regardless of the type.
While looking at the mock budget, Osenga shared ways in which developers are trying to reduce costs but said many of those result in marginal savings.
Development leaders in Bloomington-Normal are also exercising ways to encourage development and looking for ways to squeeze the most housing out of each project.
“We’re on the bleeding edge of figuring some of those things out,” Osenga said.
From flat land to a new home, what’s the cost?
Based on his estimation, it would cost a developer between $450,000 and $525,000 to turn a plot of land into a 1,500-square-foot home. That accounts for the cost of construction, materials and design, but does not include some of the costs needed to sell the home, like Realtor fees and closing costs.
Some of the elements that make new construction pricey can’t be avoided. For instance, buying land with utility and sewer hookups from the street can cost anywhere from $50,000 to $100,000, depending on how long ago it was platted.
That doesn’t include sitework and bringing utilities from the street to the planned structure. That can cost $35,000 to $40,000.
Preparing and pouring a foundation can cost the same amount.
Basements are “actually low-cost [per] square footage,” Osenga said, but not building one is one of the small ways builders can bring home prices down.
New construction homes frequently forgo basements for a crawl space. A new home with a basement may have a price tag at least $50,000 higher than the same design that has a crawl space.
From there, builders frame the structure with lumber. The materials and labor for that phase of the project can cost $55,000 to $65,000.
Turning the frame into a building worth living in can cost between $40,000 and $50,000. That means adding insulation, windows, roofing and siding.
“These are some of the ones where people say… ‘I’d be OK with a cheaper window or a cheaper exterior,’” Osenga said. “Those are marginal savings in the grand picture of all of this.”
Mechanical, plumbing and electrical components cost $55,000 to $65,000 to plan and install. That includes HVAC systems, water heaters, furnaces and other major appliances.
Then comes interior finishes like trim, drywall, flooring and cabinets. That can cost $65,000 to $75,000.
Lastly there are the touches that make the home appealing, like light fixtures and appliances. Those can cost $20,000 to $25,000 to purchase and install.
The rest of the cost resulting in the $450,000 to $525,000 total come from managing the construction project, designing and permitting work ahead of construction, insurance policies on the site and building, and lender fees. If a builder borrowed money for the project, there is interest to consider on that amount, too.
There is also the matter of making a profit. Osenga said that often accounts for about $35,000 to $40,000.
“The margins are not as significant as people think,” he said.
Developers also try to increase revenue by keeping multiple parts of the project under one roof. They also might use their own construction crew instead of a contractor.
Many of these costs are significantly higher the larger the project is. There are different safety considerations with multifamily developments too, which drive costs higher.
Especially with larger projects, like subdivision development of multifamily projects, there are investors expecting returns of at least 12%, according to Osenga.
“The bank gets paid first, the investor gets paid back second and the developer is left hoping when this is all said and done that they are in a position to generate a profit,” he said.
For single-family homes, that means high prices on the market. For multifamily buildings, that means higher monthly rent rates.
Materials, labor or both?
Sometimes the high costs come from the type of material required, or the lack of options available.
“There’s only one type of drywall,” Osenga said.
There is power in economies of scale or buying in bulk. Osenga said it takes a large amount of units to finally start bringing down the cost per square foot.
He pointed to a boom in single-family development in the 1990s and 2000s in Bloomington-Normal. Because of the scale of building, even single-family developers could purchase materials in bulk, because they were constructing large quantities of homes. Now, building just isn’t happening on that scale.
The cost of materials “hockey sticked” up during the pandemic, Osenga recalled. The current effects of tariffs have kept them up. Much of what is affecting prices is far out of Central Illinois builder’s control.
Wages for laborers have also risen over time, which contributes to higher costs. Though, there is less wiggle room when it comes to paying workers, especially as the small building industry creates less competition.
Can code get in the way?
Building codes are updated on a three-year cycle for most municipalities and are a complicated mix of national, state and municipal codes.
“As a society we’ve decided to continue to figure out what is the safest and best way to build, and so our codes continue to improve in safety and efficiency, and all of those things typically increase costs,” Osenga said.
Town of Normal Director of Inspections and Facilities Mark Clinch agreed that changes to code can increase cost, but said the changes are enacted for a reason.
Energy-related codes have tightened up in the last 10 to 15 years, which join economic forces in driving up costs.
While Osenga said the codes are adopted with good intentions of creating better, more energy efficient structures, they can also prohibit cheaper materials as an unintended side effect.
“There is a pretty significant debate on the cost implication of that,” Clinch said. “The research I’ve done… there’s really no evidence to suggest that there’s a systemic connection to a new version of a code coming out [pushing up costs],” he said.
Clinch argued there are lots of opportunities for developers to be creative in cutting costs. The code is merely a minimum standard.
“There are elements of code that certainly could increase the cost, but is it responsible for crushing the housing market? I’m extremely skeptical,” he said.
City of Bloomington Director of Development Kelly Pfeifer said the city recently decided to change some of its energy code requirements, in part to align with state law and in part to address developer concerns.
“Outside of the energy code, things have generally made sense,” Pfeifer said. “The way that we approach things is good for the ultimate person that is going to own the house and keep the house and take care of the house,” she continued. “It may not be the favorite of the contractors that are putting up the house, but they aren’t the ones that are most important.”
However, she said the office is still receptive to feedback from builders.
In the Town of Normal, the inspection department once decided not to adopt a part of building code that required sprinkler systems in single-family homes, because they felt it would be costly to builders.
Time is money
Municipal departments can make projects pricier if the review and design approval takes a long time. Pfeifer and Clinch’s offices strive for a 10-working-day review period for projects, to keep them moving.
“Franky the faster everybody gets through that, the easier it is,” Pfeifer said.
Osenga said there are discussions in the building community about ways to reduce those expenses even further. One of the solutions he’s seen is municipalities offering pre-approved floor plans and designs that are already compliant with zoning and building code.
“That takes the design cost down to zero,” he said, adding that sometimes those municipalities will waive permit fees on these designs to further incentivize builders.
Pfeifer said she’s considered pre-approved designs for triplex or quadplex structures, but also said she doesn’t think the design and review process is a significant hurdle for developers locally.
Both planning departments said they have allowed developers to build the same type of home repeatedly without having to go through the review process from the beginning each time.
“What catches the safety in the code is the permits required for each place,” Clinch said.
Increasing choice, changing up housing stock
The challenge ahead for the town and city’s planning departments is to get the maximum amount of housing out of each development.
Pfeifer said consumer preferences over homes have changed greatly over time, partly for aesthetic reasons and partly for practical ones. Currently, she said market trends indicate young consumers want small and efficient things.
“They don’t have the big furniture anymore,” she said. “As the costs of materials is higher, of course [builders] are trying to reduce footprint.”
Part of that includes encouraging types of developments that wouldn’t typically align with city or town code.
“One thing I’m advocating for is, how can we create choice?” Osenga said.
One example is a “cottage court,” which is a series of homes centered around a shared courtyard, as opposed being adjacent to each other with individual yards.
In Bloomington, code required access to the street from the front of the house. It was recently changed to allow that kind of construction. It’s a part of other changes to the city’s code that they hope will diversify development.
“We’re hoping that will help enable some of those other structures,” Pfeifer said.
An option for different housing stock could be modular and manufactured housing. Those homes are assembled in a factory and then delivered to a construction site.
There are benefits: They are cheaper and faster while still being high quality. But Osenga said there are downsides too. Modular homes would be largely homogenous. Builders can’t use their usual financing strategies for modular homes either because a developer needs to pay cash up front.
“Lumber and nails and screws and all the materials that go to a factory to build a modular home are not a real asset, you can’t underwrite it,” he continued. “They can’t go if you don’t pay your bills and seize it because it’s not worth what it will eventually be worth when it’s all put together.”
There are a limited number of builders nationwide with enough capital to purchase a large quantity of modular homes.
