San Jose staff: townhomes, stacked flats feasible now; podiums and towers need targeted incentives

Eric Sullivan, director of housing for the City of San Jose, told the Planning Commission on Jan. 14 that a city-led Cost of Development study found smaller product types—townhomes and stacked flats—are financially viable under current market conditions, while podiums, wraps and towers remain challenging without targeted intervention.

The study, prepared with consultants EPS and CSG Advisors and supplemented by JLL analysis, used a mix of a few market deals for market-rate modeling and roughly 190–200 low-income housing tax credit (LIHTC) applications for the affordable-housing analysis. Sullivan said the team modeled revenue and cost assumptions across four targeted growth areas—downtown, West, North and Southeast—and emphasized that many cost drivers are outside the city’s control, including materials-price volatility, tariffs and labor costs tied to prevailing wages.

"We need production today," Sullivan said, arguing that fee waivers and incentive underwriting have produced starts in recent periods. He pointed to the city’s multifamily housing incentive underwriting, noting "we underwrote a bunch of projects...and all those projects went into construction." Sullivan also reported a per-unit impact from taxes and fees of "roughly $37,000 to $72,000," and cautioned that compared with neighboring jurisdictions San Jose’s fees are average or lower but rent structures differ.

On the revenue side, staff presented rent and sale-price comparisons showing San Jose’s market-rate rents and prices sit below several immediate neighbors. JLL’s scenario, using a 3% annual inflation assumption, suggests that without higher rents or direct incentives podiums, wraps and towers are unlikely to reach the residual land-value and return thresholds developers require; feasibility in those scenarios may not occur until years nine or ten in the model.

The presentation also examined office-to-residential conversions under Title 14 provisions. Sullivan identified an "Italian Bank" conversion and other projects headed to council on Jan. 27 and said those conversions could yield "just about 500 units" if incentives and underwriting are applied to suitable buildings.

On the affordable-housing side, staff said San Jose has produced a large share of regional deeply affordable units, which has pushed its per-square-foot costs higher (driven in part by smaller-unit footprints and complex capital stacks). Sullivan said San Jose’s affordable development costs generally track with or sit a bit higher than peer municipalities and that the city’s capital-stacking needs for very low-income (ELI) units increase soft-cost and financing complexity.

Commissioners pressed staff on several policy questions: why West San Jose showed better podium returns in a waiver scenario (staff said model results reflect the impact of waiving fees rather than raw land-cost comparisons and that rents in the West are typically higher), what specific next steps staff recommends (expansion of multifamily incentives to Council and continued work through the four‑year general-plan review), whether reduced fees would force cuts in city services (staff framed the trade-off as reduced projected fee revenue versus the revenue that would not be realized if projects never move forward), and whether district-level data are available (staff said quarterly rent and district breakdowns are available on the Housing Department website).

Sullivan and PBCE staff emphasized two levers the city controls: (1) targeted incentive and fee-waiver programs (used on projects the city underwrites), and (2) process improvements such as speeding entitlements to reduce developer carrying costs. At the same time, staff repeatedly framed these actions as trade-offs: fee reductions can catalyze starts but also reduce fee revenue that funds services and future programs.

The session closed with staff reiterating the study’s role as informational and advisory to Council and the Planning Commission; staff said the presentation materials and full report are posted on the Housing Department website and that additional project-level and district-level data can be shared with commissioners on request. The commission recessed for 10 minutes to begin the regular agenda.

Ending: The Planning Commission received the Cost of Development study for discussion; staff scheduled several incentive items for Council consideration (including office-to-residential incentives on Jan. 27) and indicated the four-year general-plan review will be the forum for longer-term land-use and rezoning decisions.