It’s a small, red brick apartment building on a side street in Hazelwood.
It looks like many other older Pittsburgh apartments — but the 100-plus-year-old building is a case study in one of the region’s most pressing housing problems: why is it so expensive to create affordable housing?
The building, owned by nonprofit Rising Tide Partners, will soon undergo a $2.7 million rehab to upgrade nine apartments. At a total cost of roughly $300,000 a unit — which includes the cost of construction as well as other related expenses such as financing fees, architects, engineering, among other things — the building illustrates the challenges in creating more affordable housing in Pittsburgh and Allegheny County.
Pittsburgh’s most recent Housing Needs Assessment study found the city is short more than 8,000 affordable units for its lowest-income residents.
A lack of affordable housing forces people to pay a greater share of their income towards rent: the same report found two in five renters in Pittsburgh are spending more than 30% of income on housing, with more than one in four spending more than 50% of their income on housing. This means a sudden, unexpected life event or expense — the loss of a job or a car breakdown — can put people at risk of eviction and homelessness.
As housing costs have risen in recent years and political pressure has grown around the issue, elected officials have pledged to do more. In recent months, Pittsburgh Mayor Ed Gainey has touted his efforts to raise funds through an affordable housing bond, and County Executive Sara Innamorato has pledged to create 500 units of affordable housing in 500 days.
But, building affordable housing is expensive, time-consuming, and difficult. Why?
High construction costs, a complex system of financing that requires developers to assemble multiple funding sources for projects, a web of government rules, and the need to keep rents low for tenants are all factors, according to interviews with local advocates and developers.
High building costs
First of all, building any new housing — either an affordable or market-rate building — is costly, developers said. Costs include land, construction labor and materials, and services including architecture and engineering.
“All real estate development is difficult and complicated and expensive, especially post-COVID,” said Jame Eash, director of real estate development at nonprofit developer ACTION Housing.
“Affordable housing does not mean it's cheap housing,” said Robin Wiessmann, executive director and the CEO of the Pennsylvania Housing Finance Agency.
“They're built using quality furnishings that you or I would be happy to live in, that are well constructed and that are very similar to market-rate construction.” PHFA is a state-affiliated agency that runs mortgage programs for home-buyers and distributes federal tax credits that help finance most new affordable housing construction.
Weissmann also said Pennsylvania, like many other states, prioritizes green building in affordable housing that makes the housing more sustainable in the long-term and lowers utility costs — but such regulations do add up-front costs, she said.
“It's very expensive to build housing of any type,” said William Gatti, president and CEO of Pittsburgh-based Trek Development Group, which develops both affordable and market-rate projects.
Building in an older city like Pittsburgh has additional challenges, Gatti said.
On any site, “there [are] probably subsurface issues, maybe old foundations, maybe crumbling infrastructure, water and sewer, things like that. Maybe gas and electric [utilities] … have to be re-upped. We're not just doing real estate deals. We're rebuilding an old city and there's a cost that comes with that.”
(Case in point: ACTION Housing’s Flats on Forward, a 43-unit Squirrel Hill apartment building, ran into almost $1 million in unexpected infrastructure costs during construction because of a defunct old steam plant that had destabilized a nearby road and retaining wall.)
Because zoning codes in many places make it difficult to build apartment buildings, zoning challenges can also add delays — and costs — to projects.
Complex financing
Additionally, financing affordable housing has added challenges that market-rate developers don’t face, explained PHFA’s Wiessmann.
Because affordable buildings must have below market-rate rents, developers will have less cash flow coming in once the buildings are occupied — meaning they need to get more financing up front.
In an affordable property, tenants typically only pay about 30% of their income in rent, regardless of how low their income might be.
“To be able to provide housing that people can afford to pay the rent on over a period of time, the key to it is getting enough funding upfront. So that the amount to sustain it over a period of time is an amount that renters can afford to pay,” Wiessmann said. “And that's a challenge.”
Affordable housing developers typically compete to get tax credits to finance their projects. But these tend to cover roughly 80% of the costs of a project, and developers must fill in the gap from other sources. Those other sources often have extremely complex rules and requirements, which can add costs as well.
“It's typical on our … projects to have 11, 12, 13 [funding] sources — each one of those having different requirements that we have to keep track of,” said ACTION Housing’s Eash. “And it takes time and certainly money to make sure that we're following all the rules that are tied to these funding sources.”
If there were one source of funding to cover the cost of an entire project, such projects would be cheaper, said Kendall Pelling, executive director of nonprofit Rising Tide Partners.
“Each layer of requirements adds more things that have to be done,” he said, both physical changes, and process or legal changes.
“Each layer of requirements also adds complexity. This complexity adds costs,” he said.
In the case of Rising Tide’s apartment building in Hazelwood, the small nonprofit raised $2.7 million to completely rehab the building and renovate nine apartments.
The organization was able to cobble together funding for upgrades from a number of different sources — but each new source of funds added requirements and costs, such as environmental requirements, prevailing wage requirements, design standards for the architects, and contractor bonding requirements, pushing the total cost upwards.
“Affordable housing is something that's very highly regulated — and it's not regulated with one set of rules,” Pelling said.
The building was initially in poor condition — lacking basics such as insulation, and with serious problems that required replacing its heating system, Pelling said.
When work is complete, it will house people who have experienced homelessness, domestic violence, or other crises in their life, Pelling said.
“So it's providing the kind of housing for folks who really need it,” Pelling said.
Construction has started and is expected to be completed in the fall.
