The throaty roar of an approaching motorcycle can be heard at a construction site off Holcomb Avenue in Reno’s popular Midtown district in April.

Moments later, a man wearing a denim jacket and jeans gets off and surveys the mix of dirt and concrete before him. With workers in tow, he hops on top of a narrow footing and carefully walks across to the other side.

Fees, city requirements and roots of an old locust tree have delayed a Marmot Properties development in Midtown Reno. Jason Hidalgo/RGJ

It isn’t the first balancing act that Bryan Raydon has done at this site. The development manager for Marmot Properties says this project has been delayed for months. Chalk it up to Midtown being, well, Midtown.

Once seen as a forgettable stretch between downtown and the shopping centers in the southern part of the city, Midtown’s resurgence has made it attractive for developers in Reno. But the neighborhood has a sadistic side once they get to know it better.

“Midtown varies block by block,” Raydon said. “Some blocks don’t have gas. Then you’ve got blocks near Haskell (Street) with these itty bitty water lines. You also have lines that only go 2 1/2 to 3 feet deep, which would be continually problematic.

"It’s not a complaint, it’s just reality.”

It’s a reality that intruded on Marmot’s latest Midtown project — a duplex apartment made from shipping containers. Before Raydon could start on it, the project hit one gigantic obstacle.

The roots of a towering old locust tree had grown into all the sewer lines underneath the property and were threatening the foundations of the existing buildings.

“We chased roots and roots and more roots,” said Rick Potts, an employee of contractor Twisted Metal. “That tree kicked our ass.”

Dealing with that one tree not only cost Raydon several months, it came with a financial cost as well. When Raydon started the project, he envisioned a complex of four tiny units with rents of $1,000 per month. The connection fees and parking requirements for four homes, however, would have made the project more expensive.

Add the cost of the delays from the tree and Raydon decided to construct a duplex with higher rents instead. Raydon initially targeted each duplex unit to rent out for $1,400 to $1,500 — the market rate for the area. After the delays and added costs, he is now eyeing $1,700 a month instead.

“These will have to be ($1,700) because it cost so damn much,” Raydon said. “We thought a lot about tiny homes but we just couldn’t get the math to work.”

From homeowners and buyers to developers and local leaders, the housing crisis affects many in the Reno-Sparks area. We will continue digging into the obstacles our community faces to find affordable housing. Please support our in-depth investigations by subscribing to rgj.com .

Fewer housing permits, more expensive homes

As an influx of jobs and new residents fuels a housing affordability crisis in Reno-Sparks, one question arises: Why are developers not building more houses?

In the last decade, Washoe County averaged 1,352 single-family home permits per year. That is much less than the 36-year average of 2,470.

Even after taking out the numbers from the Great Recession years that followed the housing market’s collapse, permitting activity was still lower than average.

Here are the yearly averages for permits for single-family houses issued in Washoe County during various periods since 1983:

1983 to 1989: 2,698 per year

2,698 per year 1990 to 1999: 2,485 per year

2,485 per year 2000 to 2006: 4,120 per year

4,120 per year 2007 to 2012: 848 per year

848 per year 2013 to 2018: 1,872 per year

As housing demand ramped up in the last few years, Reno-Sparks started breaking records for price. Just last month, the median price for an existing single-family house in the city of Reno set another record after reaching $420,500 in May. That’s up 31 percent from January 2017.

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Incomes, meanwhile, have not kept pace with the skyrocketing cost of housing. Between 2012 and 2017, wages for households in the Reno metro area grew by 25%, according to data from the Census Bureau American Community Survey. During that same period, the median price for existing single-family homes jumped by nearly 140%.

One important thing to note is that Reno median household incomes fell by 15% from 2008 to 2012, which means the wage increase in the five years that followed is not as big as it seems.

“Reno is booming but not all our families are feeling that,” said Reno Councilman Oscar Delgado at a recent groundbreaking event for affordable senior housing. “The struggle is real for these families.”

Part of the huge spike is because the housing market had more ground to make up for. After the real estate bubble collapsed, the resale market for single-family houses lost more than half of its value. In January 2006, for example, the median price for an existing home in Reno-Sparks reached a then-record of $365,000. By January 2012, it was down to $135,000.

At the same time, an analysis by the Reno Gazette Journal last year found that median household incomes in the area fall short of being able to buy the median home. In order to afford a $387,000 house, you will need a median household income of $80,000 a year.

The median household income in the city of Reno was $57,125 in 2017 and $61,498 for Washoe County — which includes Sparks and Incline Village — according to the Census Bureau's ACS data.

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Reno is not alone. Home prices are outpacing wages in 40% of U.S. housing markets, according to a report released in June by ATTOM Data Solutions. The same report found that the median-priced house also is not affordable for average wage earners in 74% percent of U.S. housing markets.

“Half of America can’t qualify for a loan — that’s one reason you’re seeing rents go up so much,” said Glenn Kelman, CEO of online real estate brokerage firm Redfin.

“They are living on the edge,” Kelman added. “They are scraping every dollar they can get to afford a mortgage (and) that’s what makes the real estate market so volatile right now.”

While opinions vary among developers, government officials, housing advocates and economic development circles about how to best solve the housing crisis in Reno, all sides agree on one thing: Lack of supply is a big factor in the steep increases in house prices.

The question now is, why?

Here's why Reno-Sparks is in the midst of an affordable housing crisis New jobs are fueling housing demand in Reno-Sparks, yet the area averaged fewer home permits per year the last 6 years than in the 1980s. Sam Gross, Jason Hidalgo, Jason Bean and Benjamin Spillman, Reno Gazette Journal

Why are fewer housing permits being issued?

From 1983 to 2007, Washoe County averaged 2,979 building permits for single-family homes annually.

The building frenzy reflected Nevada’s status as the fastest-growing state in the nation. In Washoe County, permits for new homes peaked at 5,809 in 2005, with activity never falling below 1,600 permits per year.

That all changed in 2008.

Beginning that year, Nevada’s housing market started tumbling toward an epic collapse. By 2011, unemployment in Nevada was above 14% — the highest in the nation at the time. Real estate’s downward spiral hit Nevada’s construction sector especially hard. By the time the bloodletting was done, it lost about 70% of its workforce across the state.

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During the peak of the housing boom in 2005, there were roughly 65 builders operating in Washoe County and surrounding areas, said Don Tatro, CEO of the Builders Association of Northern Nevada. By 2015, they were down to 24. Even as Nevada recovered from the crash and regained its status as the fastest-growing state in the nation by 2018, the memory of Nevada’s historic real estate crash made local builders especially hesitant about ramping up operations, according to Tatro.

“They got wiped out,” Tatro said.

“We’ve seen a lot of consolidation in building, and a lot of subcontractors are unwilling to grow,” he added. “They don’t want to lay off a lot of people like they did in the recession so they’ve found a sweet spot of how many employees they want to have and manage at an easier level.”

Several other factors are being cited for why new construction is not keeping pace with housing demand. Rob Dietz, chief economist of the National Association of Home Builders, uses a concept that he calls "The Five L's" — labor, lumber, lending, lots and laws — to explain the various elements that can impact the cost of building new housing.

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For developers, addressing all those elements can be akin to playing whack-a-mole, according to Dietz.

"Housing affordability is a really complicated topic," Dietz said. "There's no silver bullet (that fixes everything)."

Brian Bonnenfant, project manager for the Center for Regional Studies at the University of Nevada, Reno, agreed with Dietz and says he would add one more "L": litigation. In addition to cases involving construction defects, Bonnenfant also pointed to a $50 million lawsuit filed against the city of Reno by the developers of the proposed 4,700-unit Daybreak housing development at the former Butler Ranch site. The developers claim they could lose $100 million after the city denied the project late last year.

“This is a problem with a lot of moving parts,” Bonnenfant said. “And they all move together and impact construction activity.”

The construction industry is under stress and underemployed

When the Great Recession pulled the rug out from under the building industry, many construction workers who lost jobs ended up transitioning to different careers. This compounded a longstanding problem in the industry, which has been raising concerns about its difficulties in recruiting younger people who do not see construction as a viable or sexy career path.

Groups such as the Associated General Contractors of America say such issues arise because society prioritizes preparing for a four-year college education over skilled trades. This focus impacts the education system as well as the types of funding programs available, the organization said.

“We need more public officials to understand that the path to a good, middle-class life doesn’t always include attending a four-year college and spending a lifetime behind a desk,” said AGC America CEO Stephen E. Sandherr in November.

As of April 2019, 404,000 construction positions were open in the U.S. In Nevada, 79% of construction companies reported difficulties hiring hourly craft laborers. Jason Hidalgo

Earlier this year, the Department of Labor reported that the U.S. economy as a whole was facing a nationwide labor shortage of more than 1 million workers at the end of January. Construction is no exemption. As of April this year, the number of open construction positions totaled 404,000, according to the National Association of Home Builders, citing Bureau of Labor Statistics data.

A report released in September by the AGC America found that 4 in 5 construction companies were having a difficult time filling hourly craft positions, which make up the bulk of their workforce.

In Nevada, 79% of construction companies reported difficulties in hiring hourly craft laborers, including:

Laborers

Carpenters

Plumbers

Roofers

Mechanics

Concrete workers

Sheet metal workers

Truck drivers

As the U.S economy recovered from the recession and demand for construction ramped up across the country, competition for a limited labor pool suddenly became fierce. The loss of entire communities from natural disasters and wildfires in recent years further added to the demand for labor as the affected areas needed to be rebuilt, according to Bonnenfant.

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For developers, the labor shortage doesn't just lead to delays in building. When competing for a limited pool of workers, it becomes necessary to pay those laborers even more, said John Keeling, executive vice president of Valencia Hotel Group, at the National Association of Real Estate Editors 2019 conference in Austin in June. This is done either to attract workers or prevent existing employees from going elsewhere for higher wages.

“The construction industry is under stress,” said Keeling, who described the overall labor situation in the United States as “a crushing issue.”

“There aren’t enough subcontractors. You have tariffs on steel. General materials are up. And then you have (rising) land costs.”

Lumber especially saw plenty of volatility, with prices jumping by 31 percent during the first half of 2018 before tumbling down by 35 percent by the end of the year, according to analytics firm Forest2Market. Meanwhile, costs for construction equipment and raw materials such as insulation, roofing, siding and steel were up overall.

Pricing for asphalt roofing and siding, for example, rose by 10.9% last year while steel pipe and tubing was up 21.3%, according to the Bureau of Labor Statistics. Although steel prices fell at the start of 2019, trade and tariff disputes are adding uncertainty to the market and making it more difficult to forecast which way material costs will go.

Concerns over a potential economic slowdown have lenders starting to exercise more caution as well. With several construction industry indicators such as the Dodge Momentum Index showing signs of a potential slowdown by 2020, risk management is becoming an increased focus for lenders.

“They’re not going to put money behind speculative housing,” Bonnenfant said. “They’re going to lend to demand.”

After hitting historic highs in 2018, the Reno-Sparks housing market saw prices stabilize at the end of the year. Here’s what Angelica Reyes, president of the Reno/Sparks Association of Realtors, said to expect at the beginning of 2019. JASON HIDALGO/RGJ

Lenders such as Wells Fargo are also seeing less appetite for speculative building from builders, who remain more cautious and are building based on demand. This impacts not just permitting but the number of loan applications for housing projects, said Stuart Brady, Wells Fargo’s Northern Nevada Commercial Banking Manager.

“Overall, builders are definitely building more cautiously based on demand and that could be contributing to the decline in permitting and traditional residential development commercial lending in Reno-Sparks,” Brady said. “Many of the land transactions are cash or private money.”

For smaller developers such as Marmot Properties, financing — or the lack thereof — has killed some projects. This includes development of a property in Midtown Reno’s Haskell Street, which had issues with aging infrastructure. The issues include old water lines, which would have required significant financial investment to replace. Marmot has since sold the property to a Connecticut-based private equity group.

“We couldn’t make the project pencil out with outside investors,” Raydon said. “We just didn’t have the capital.”

Lots and laws affect Reno most

One sore spot frequently mentioned by developers and builders about Reno is its confluence of regulations and requirements. In some cases, there appears to be a disconnect between the city's goals for housing and how some of the regulations are written, Raydon said.

“The city of Reno is really good in a lot of respects, but in other respects it’s not,” Raydon said. “They say they want more density but want everybody to have one-and-a-quarter parking spaces. They say they want more affordability but they charge the same fees for urban infill projects as they do for resource-hogging starter castles.

"They talk from both sides of their mouth sometimes.”

Of the five L’s that impact construction, nothing has engendered more debate between developers and local government than lots and laws. Part of the challenge is geography. With the Truckee Meadows surrounded by mountains, finding new areas to develop is easier said than done.

“Lots are in short supply and they’re expensive to create,” Bonnenfant said. “The easy ones where there’s infrastructure and capacity for sewer and water are all spoken for.”

For smaller developers, like Marmot Properties, financing — or the lack thereof — has killed some projects. Jason Hidalgo/RGJ

In response, developers are starting to look further outward, including less geographically desirable areas for construction. These places include the former Butler Ranch site in southeast Reno. The area was the subject of spirited discussion in recent years after developers proposed a 4,700-unit development called Daybreak at the site.

The Reno City Council ultimately voted down the project 6-1 in November. Reasons cited include:

Mercury-tainted soil

Potential traffic and congestion

How the area was the community’s last remaining natural flood plain

Ongoing flooding issues at the Swan Lake community in Reno's Lemmon Valley also served as a cautionary tale, even as proponents for development contend that they have the technology to ensure the same issue does not happen in Butler Ranch.

The city of Reno's decision was criticized not just by developers but some in the economic development community as well.

Back in 2015, President and CEO Mike Kazmierski of the Economic Development Authority of Western Nevada sounded the alarm about the greater Reno area’s upcoming growth and warned that the community will need to build 5,000 new homes per year just to keep up with it.

At the time, Kazmierski saw pushback. With the housing crash still fresh in builders' minds, some in the local developer community saw the number as unrealistic. Today’s housing crunch has since validated EDAWN’s forecast, which is based on the first Economic Planning Indicator Committee or EPIC Study.

“At the end of the day, we need more housing and if that means we build on land that’s not perfect and engineer solutions for their problems, then that’s what we need to do,” Kazmierski said. “We’ve got BLM land all around us so it’s not like we have a bunch of land nearby to expand to.”

Another solution being floated by Kazmierski and others is more infill and “missing middle” development. Missing middle housing refers to buildings that help increase density such as townhouses, duplexes and bungalow courts. Missing middle housing also can be sold at a lower price per unit than a single-family home, making them a potential option for entry-level housing.

Developers, however, say regulations and increasing fees, combined with the cost of development, make it tough to build new missing middle projects, much less affordable or workforce housing for residents. Nationwide, government regulations account for 24% of costs associated with the development and construction of new homes, according to the National Association of Home Builders. For multifamily projects, the cost goes up to 32%.

The cost of regulation is not limited to fees but also the time spent just waiting, said Will Holder, a professor of practice and construction science management at Texas State University and former president of Trendmaker Homes. Time is literally money for a developer paying 1% each month on an $80,000 credit line while waiting for approval from a government entity, he said.

“You're talking $800 a month to sit there and watch grass grow on a lot,” Holder said. “And that (cost) is later obviously transferred to the home buyer.”

Mike Kazmierski, president and CEO of the Economic Development Authority of Western Nevada At the end of the day, we need more housing, and if that means we build on land that’s not perfect and engineer solutions for their problems, then that’s what we need to do. Quote icon

Rising costs are also a big reason why you are seeing a lot of luxury housing developments in Reno, according to Tatro. That's because those are the only projects that will pencil out financially once higher costs are factored in, he said.

“The cost of developed land is higher, building codes are growing, fees are going up — and that has significant impact,” Tatro said. “We’re trying to build missing middle housing but it’s painstakingly long to get those projects moving.

“Multi-story projects are also cost-prohibitive so you’re not going to get a 10-story workforce housing project unless it’s heavily subsidized.”

How are local governments responding to the housing crisis?

Developers seeking subsidies for affordable housing received an assist from the 2019 Nevada Legislature, which passed a couple of bills related to the issue:

One was Senate Bill 103, which allows local governments to subsidize building permit and impact fees by slashing or eliminating them for affordable housing projects.

Another, Senate Bill 448, gives developers up to $10 million in transferable tax credits.

Critics say it’s interesting that developers get subsidies while regular people are left to fend for themselves in a tough real estate market.

Watch: Reno renter Stephanie Lee talks about her rent increase Reno renter Stephanie Lee is facing a 40 percent rent increase. Jason Bean, RGJ

With median-income households unable to afford a median-priced house and renters being subject to skyrocketing rents and no-cause evictions, businesses should not be getting handouts, said Bob Fulkerson, development director for the Progressive Leadership Alliance of Nevada.

“It’s like, if these guys had to survive in the free market, they’d go broke,” Fulkerson said. “It’s socialism for developers and capitalism for the rest of us, so I have zero patience for them.”

Local governments, meanwhile, say they have been working with developers to help streamline the permitting process.

Ten years ago, the city of Reno updated its zoning code to simplify the review process, said Claudia Hanson, planning manager for the city of Reno’s community development department. This shaved a couple of months from developers’ timelines because many projects did not have to go through hearings anymore.

The city of Reno is also updating its parking standards, which were written 15 years to 20 years ago and are "fairly out of date" because they don't take into account new trends such as ridesharing as well as improvements involving transit and walkability, according to Hanson.

In some cases, delays occur because of application errors, Hanson added.

“A lot of times, we’ll see developers submit whatever they have whether it meets code or not just to meet their deadline,” Hanson said. “This really slows the process on our side if they submit an incomplete set of plans.”

Midtown’s resurgence has made it attractive for developers in Reno, but the neighborhood has a sadistic side that intruded on Marmot Properties' latest project — a duplex apartment made from shipping containers. Jason Hidalgo/RGJ

To reduce delays from erroneous applications, local governments such as Reno and Washoe County offer free pre-application or pre-development meetings. The meetings allow developers to sit down with various experts from departments such as engineering, building and fire to do a high-level review of their application before it is submitted.

Sarah Tone, business facilitator for Washoe County’s community services department, recalls one developer who did not understand why engineering needed to look at his development site and its water flows.

“We sat him down and showed him the water flows in and out of his system and how it had the potential to cause the house to fall down because it would have eroded his foundation,” Tone said.

As far as complaints about changes in codes and regulations, representatives from Reno, Sparks and Washoe County say those are done to stay in line with changes to building code standards. These include federal as well as international codes, which have minimum requirements that must be met.

Nevada, for example, typically adopts new building codes in a five-year cycle, and there are always changes to them, said John Martini, assistant city manager for Sparks.

Cylus Scarbrough, management analyst for the city of Reno's community development department They have to be knowledgeable in affordable housing regulations and the federal laws and codes around that. There’s not many developers really interested in engaging in that universe. Quote icon

“It’s incumbent upon the building and safety division to stay current with codes, it’s that simple,” Martini said. “It’s a safety and welfare issue for the people who live here because we get high winds, we get snow, we’re subject to a fairly high risk for earthquakes, so we have to keep up with those house codes.”

Reno, for example, sees notable seismic activity every year, including a recent earthquake swarm on June 6. The series of 10 earthquakes within a six-hour period included a magnitude 3.7 quake.

There are also several options available via local, state and federal programs to help developers build affordable housing projects, said Cylus Scarbrough, management analyst for the city of Reno's community development department. These include large-scale affordable housing funding initiatives such as the federal Home Investment Partnership program.

Although not unlimited, such resources are still substantial, Scarbrough said. The issue is that affordable housing projects require specialized expertise.

“They have to be knowledgeable in affordable housing regulations and the federal laws and codes around that,” Scarbrough said. “There’s not many developers really interested in engaging in that universe.”

What's going up and what's going down

A huge billboard advertising country artist Toby Keith’s concert at the Nugget Event Center in Sparks can be seen from Interstate 580.

Just a few months ago, the venue on Sparks’ Victorian Square was a dirt lot. By mid-June, the site has been transformed into an 8,958-seat amphitheater — the latest in a development blitz that is adding a bunch of apartments and amenities such as restaurants right in the middle of Sparks’ urban core.

“They’re getting a downtown overnight,” said Bonnenfant of UNR’s Center for Regional Studies.

While folks such as Tatro have described Reno as “the stick in the mud” for development, Sparks has received more positive feedback from developers for its efforts to keep projects moving. Despite that, the city is not exempt from one common complaint raised by developers: rising fees.

This year, a 30% increase in sewer connection fees took effect in Sparks. This was accompanied by a 2.96% increase in storm drain connection fees, with both rising by 5% annually through 2022.

Fee increases are a frequent refrain heard from builders as an obstacle to more development. The rising costs are also passed on to the final product, which helps contribute to the declining affordability being seen in the market, according to Tatro.

“For every $1,000 increase in the price of a house, 251 people are priced out,” Tatro said. “We’re trying to get product to the market but you have thousands of people who can’t buy them.”

Martini, however, says Sparks has no choice.

The Sparks City Council approved the increases in response to “significant expenses” that will be coming in for the Truckee Meadows Water Reclamation Facility, which treats waste water in Reno-Sparks. Raising the fees was a way to make sure that development is paying its fair share, Martini said.

Incomes have not kept pace with the skyrocketing cost of housing in the Reno metro area. Chastity Laskey/USA TODAY Network

Martini also echoed a statement heard from Reno and Washoe County. While the economy is booming, local government revenues have yet to catch up. A large part of the issue has to do with Nevada’s property tax abatement, which greatly devalued properties after the recession but capped how high they could increase per year at 3% afterward.

“All that abatement money is simply gone,” Martini said. “When we came out of the recession, the world around local government recovered but local governments have not recovered yet.

“We are just starting to see general fund revenues increase due to property tax and that is simply due to new development.”

Washoe County, meanwhile, says it saw a revenue gap of $107,000 for permits because it froze automatic fee increases.

The county also faces its own unique issues for development such as limited density. Development in Washoe County, for example, is capped at three units per acre by law, said Mojra Hauenstein, division director of planning and building for the county’s community services department.

While permitting activity for single-family homes is down compared to the 36-year average, one segment is seeing increased activity overall. In 2017, apartment permits outpaced house permits in Washoe for the first time at 2,974 vs. 2,133. This helped total permits break the 5,000 mark for the first time since 2005.

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Despite that, housing — whether it be single-family homes or apartments — remains unaffordable for a huge swath of the community’s population.

At the end of the day, everyone is on the same team, even if it might not seem that way, Hauenstein said. Everyone has to be in order for the housing problem to be solved, she added.

“There’s this misconception that we’re not on the same side but I really believe we are,” Hauenstein said. “A lot of the people who work here used to be on the other side of the counter so we truly understand the impacts of permitting on people’s livelihoods.

“It’s just not an easy process.”

Although builders, developers and local governments typically get most of the attention when it comes to the rising costs for a new home, one contributing factor that doesn’t get as much attention are homebuyers themselves. More specifically, the expectations that many homebuyers’ have for what an entry-level home should be are a lot different these days than they were even just a few years ago, Holder said.

There was a time when builders could throw in a pre-formed Formica countertop and add a tile backsplash to a kitchen and call it a day. These days, buyers are expecting features such as all stainless steel appliances and granite countertops, according to Holder.

“We can probably build a really stripped down, airtight home (at a lower cost).” Holder said. “But I think you'd find people wouldn't buy it.”

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Jason Hidalgo covers business and technology for the Reno Gazette Journal, and also reviews video games as part of his Technobubble features. Follow him on Twitter @jasonhidalgo. Like this content? Support local journalism with an RGJ digital subscription.

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