With the city well behind its housing goals and high construction costs shelving efforts to build, San Jose is considering expanding financial incentives to spur the next wave of development projects.
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Meanwhile, despite extending a program to encourage more high-rises to be built in 2024, residential density in downtown remains stagnant, so city officials want to explore offering incentives to convert commercial space into homes.
“I would rather get the housing built — create homes and opportunities for people — grow the local economy and have an ongoing and growing tax base than fight over one-time fees, taxes and other requirements that we’re not even getting because projects are too expensive to build and can’t secure financing,” San Jose Mayor Matt Mahan said in an interview with The Mercury News. “We’re optimizing for the wrong thing. We need to optimize for the outcome at scale, which is building the housing we need where it makes sense.”
San Jose’s housing data shows it is not on track to meet the state’s mandated goal of planning for 62,200 new units by 2031, as developers have repeatedly told the city that projects have become infeasible to build.
Over the past four years, construction costs in San Jose have jumped 34.4%, nearly double the California consumer price index. The greater San Francisco Bay Area also is generally more expensive to build market-rate and low-income housing tax credit program projects, according to a RAND study last year. For example, the average total development cost per unit in the Bay Area for market-rate projects was nearly 1.6 times that of San Diego and almost 3.2 times that of Texas.
Mahan called the rising cost of living a failure of public policy. While many of the root causes of San Jose’s housing production woes are beyond the city’s direct control, it could still play a role in facilitating construction.
“We could all just throw up our hands and say ‘Well, interest rates are too high, so until the Fed figures that out, nothing is going to happen,’ but I don’t buy that,” Mahan said. “The reality is that all these things are not binary and all potential projects lie on a spectrum of feasibility. Every time you make housing 1% more feasible, you get more units.”
The first phase of San Jose’s initial multi-family incentive program reduced construction taxes by 50% for the first 1,800 units built in designated growth areas that submitted complete applications by June 2022 and had obtained building permits by the end of 2025. It also reduced the inclusionary housing requirement to 5% of units at 100% area median income, down from the standard 15% requirement at various affordability levels.
According to a city memo, the program resulted in over $20 million in tax and fee waivers for the first five projects.
The next phase of the incentive program under consideration on Tuesday will expand the 50% tax reduction from 1,800 to 3,600 units for eligible projects that receive a building permit before Feb. 28, 2027. Once the city surpasses the 3,600-unit cap, it will offer 25% construction tax reductions for qualifying developments.
The city’s downtown high-rise program could also see significant changes approved Tuesday. Launched in 2012, the tax and fee reductions helped lead to 1,226 completed units between The Graduate, Miro and The Fay high-rise buildings. But after extending the unit cap to 4,078 last year, no new projects used the program.
The latest changes include financial incentives for appropriate downtown commercial-to-residential conversion projects, including a 100% waiver of building and construction taxes and a 50% reduction of park impact fees for the first 500 units, as the office market continues to struggle. The following 1,000 units that use the program would receive a 50% reduction in taxes and a 30% reduction in park impact fees.
Mahan, Vice Mayor Pam Foley and District 3 Councilmember Anthony Tordillos, who represents downtown, have also asked the city to create a higher incentive tier for projects that pay prevailing wages and support apprenticeship programs.
The other substantial change the city could make is to its inclusionary housing requirement. Currently, rental projects must offer 15% of units at 50-100% of the area median income or 10% at 30% AMI. The city has proposed that 15% of units be offered at 60-110% of AMI, arguing that higher rents would spur more housing construction.
Last year, the AMI for a family of four in Santa Clara County was $195,200.
Over the past four years, the city has received 404 applications subject to the inclusionary housing ordinance, yet developers have completed only 43 projects. In the current housing cycle, the city has also only added 431 low-income units, which amounts to less than 5% of the 8,687 units it needs by 2031.
The proposed housing changes have drawn the support of the San Jose Chamber of Commerce, which stated that housing is among its members’ top concerns and requires “decisive action” to meet the state’s mandated goals.
“Employers consistently cite housing costs and availability as major barriers to growth, talent recruitment and long-term investment,” President and CEO Leah Toeniskoetter said. “Streamlining policies that make it easier, faster, and more cost-effective to build housing is essential to the city’s future.”
Catalyze SV Executive Director Alex Shoor said he would also like the city to explore more modular construction and an incentive program for mass timber projects, which could be cheaper and faster to build.
“Local governments need to be really super-focused on how we get the most housing units possible to achieve our goals, bring down costs for your residents and keep our communities and families together,” Shoor said. “The planning field has also become too prescriptive, too complex and too technical and needs to be simplified to focus on outcomes and less on process.”
Mahan agreed that modular construction could help increase housing production, noting that steel-frame building blocks produced on an assembly line could reduce costs by around 20%.
He also acknowledged that the city has made the process to building housing too difficult at times, which is why it is looking at changes to project review times, adding a fee calculator, and testing an AI tool for ADU permits that, if successful, could be rolled out to other project types.
“We need to think more about being a facilitator rather than a regulator,” Mahan said.
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