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San Jose fell short of its annual housing goals last year, missing one marker by 1,000 homes and prompting the City Council to ask a key question: Why aren’t developers building here?

San Jose permitted 2,973 new homes in 2018, according to the city. That’s a far cry from the 3,986 annual goal set by the state, and an even farther cry from Mayor Sam Liccardo’s goal of 5,000 homes a year. To make matters worse, the number of homes permitted by the city actually dropped 4 percent last year compared to 2017.

Rising construction costs and flattening rents have made development increasingly difficult, cutting into builders’ anticipated profits, scaring away potential investors and preventing projects from getting off the ground, city officials said this week.

That shift has left San Jose struggling to meet its production goals, even as the city grapples with a housing shortage that’s making it hard for everyone from teachers to techies to live here. The problem raises a broader question for cities throughout the Bay Area: Will they be able to build their way out of the housing crisis?

“What I’m hearing from the development community is zero. They’re saying we’re stuck,” Liccardo said during Tuesday night’s City Council meeting. “It’s not because they don’t want to. It’s because they can’t get a loan. They can’t get financing.”

Meanwhile, the San Jose metro area remains one of the most expensive places in the nation to rent or buy a home. The median price to buy a single-family house in Santa Clara County was nearly $1.1 million as of January, according to real estate data firm CoreLogic. And rents have increased 28 percent over the past five years, reaching an average of more than $2,400 a month at the end of last year, according to the city.

Despite seeing a construction slowdown in 2018, San Jose actually is on track to exceed its long-term, market-rate housing production goal. The state requires San Jose to build 14,231 market-rate homes between January 2014 and October 2022, according to the city’s Regional Housing Needs Allocation goal, or RHNA. San Jose already is 83 percent of the way there.

But when it comes to building housing that’s affordable for its low-income residents, San Jose is way behind. The city has permitted just 13 percent of the state-mandated affordable housing it’s supposed to produce by 2022.

That dearth of affordable homes is extremely concerning, said Jennifer Loving, CEO of Destination: Home, which works to end homelessness in Santa Clara County.

“These are the folks that are homeless, the folks that are in precarious situations every single month,” Loving said. “And this is the area that, in all jurisdictions, gets the least amount of attention.”

San Jose isn’t the only city struggling to build affordable housing. Last week, Oakland officials said while the city is on track to surpass Mayor Libby Schaaf’s ambitious goal of building 17,000 new homes by 2024, it’s falling behind on low-cost housing. The city has approved just 751 affordable units since 2016 — far less than the 1,785 units it should have permitted by now.

These days, San Jose is struggling even to get market-rate housing built within its borders. In 2017, Liccardo went above and beyond the state’s RHNA goals and proposed his own bold plan to build 25,000 new homes by 2022 — or 5,000 a year.

But after Liccardo’s announcement, San Jose’s housing production slowed. The number of residential building permits issued last year dropped 4 percent from the year before, according to the city.

On Tuesday, Liccardo said he was “aghast” to find that the city last year granted planning permits for fewer than 200 housing units — a step before issuing a building permit — signalling there aren’t many homes waiting to be built.

That may be because it’s getting harder for developers to make money here. Construction costs are increasing at a rate of 5 to 10 percent a year, according to a memo prepared for the city by real estate advisory firm Keyser Marston Associates. At the same time, average rents in the region grew by just 1 percent in 2017, compared to 10 percent in 2015, according to the firm’s analysis of local rents as reported by three major property companies. That discrepancy means many housing developments proposed in San Jose, particularly the type of costly high-rise apartment buildings the city is attempting to attract downtown, could end up in the red. Instead of taking that risk, developers are declining to build.

Liccardo on Tuesday suggested temporarily reducing fees and taxes for high-rise apartments downtown and exempting them from city rules that require builders to reserve 15 percent of their units for low-income renters.

Councilwoman Maya Esparza suggested the city also consider reducing fees for housing developments that include low-cost units reserved for San Jose’s poorest residents.

“We need to remember that there are those in our city that need a little more of our support,” she said.

Last year, San Jose approved just 62 of the 525 homes it was supposed to set aside for extremely low-income residents — those making $39,900 or less for a family of four.

Council members were supportive of both Esparza and Liccardo’s suggestions, which will be analyzed by city staff.

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Destination: Home applauded Esparza’s proposal to create new incentives to build below-market-rate housing.

“They need to fast track extremely low-income development,” Loving said before the council meeting. “They need to remove all the barriers to creating housing for the most vulnerable people.”