Lebanon is at the center of regional housing development

"Since the COVID-19 pandemic began in 2020, the process of developing homes in Vermont has become more lengthy, more costly, and more complicated than ever before," says a report released by the Vermont Housing Finance Agency (VHFA).

While there were challenges before the pandemic, the study found that nearly 90% of developers and contractors surveyed have been experiencing project delays and higher costs beyond typical year-over-year increases. These are due primarily to the shortage, and increasing cost, of labor; the high and volatile cost of materials; and "overlapping and sometimes excessive regulatory and permitting burdens" at the federal, state, and local levels.

The average cost of an apartment funded through VHFA's Low-Income Housing Tax Credit Program (typically ranges from 5 to 9 projects annually) was $333,774 in 2021, a rise of 9% over last year. Projected 2022 numbers increase to $347,793, another 4.1% jump.

One survey respondent quoted in VHRA's report outlined the increases:

“[In 2014-2015], we were building good quality rental housing at $130-150 per square foot [for] hard construction cost. By 2019, we saw that up to approximately $200 per square foot, a 30-50% increase in just 5 years, much faster than the pace of Consumer Price Index-level inflation. My sense is that we are looking at easily $225-250 per square foot today.”

In addition, pandemic-related injections of state and federal funding for development of affordable housing, while needed, are increasing competition for labor and materials and ultimately contributing to higher costs, the study reported.

"Escalating costs make projects unviable, increase unaffordability, or require the developer to pause to seek out new funding sources," the study says. "More than 89% of survey respondents indicated that costs have increased beyond expectations. Even more startling is that 64% reported that they had abandoned or substantially delayed starting a project due to cost pressures."

The typical delay for projects was reported at 4-7 months. Despite this, with statewide data through September of 2021, there has been an increase in permitting for new multi-family buildings (5+ units) since last year, up to 56 so far from 48 total in 2020. However, this doesn't necessarily mean that construction has started on all of them. Recent Congressional testimony from the National Association of Homebuilders noted, "As a concerning sign that the market may be slowing down, the number of housing units authorized but not started has risen 40% over the past year, setting records...."

An apples-to-oranges comparison of data released by the New Hampshire Housing Finance Authority (NHFA) spanning the summer of 2020 to 2021 shows an average cost per unit of $170,595, roughly half of that reported in Vermont. However, their project list includes rehabilitations, which are often more affordable than new construction, and substantially larger projects than would be typical in Vermont (such as a 152-unit development in Nashua). Larger developments enjoy cost savings from their economy of scale. NHFA's data also includes projects committed to, permitted, and completed, which means some of these projects could have been initiated before the pandemic while others have yet to break ground and costs could still shift.

Unlike the VHFA study, NHFA details specific projects. A 5-unit rehabilitation in Lebanon is projected to cost $448,842 per unit, while a 28-unit rehabilitation in Claremont is projected to cost $131,062 per unit. A new construction development of 24 units in Hanover is projected to cost $245,000 per unit. As for recently completed projects, 36 units were added as new construction in Claremont for $288,374 per unit, and 29 units of new construction were added in Lebanon for $275,150 per unit.

It's difficult to draw comparisons between Vermont and New Hampshire. Available data and reporting, including what data is reported and in what timeframe, varies between the states. In addition, costs can vary widely from project to project depending on countless factors.

Cost increases are a reality, however, even if you're just looking at lumber and steel prices, and that translates to potentially higher rents. This reduces project viability to areas such as regional centers, where people are willing to pay more and public water, sewer, and transportation make multi-unit development more economical.

VHFA study: “[Outside Chittenden County] costs are as high as elsewhere but rent and price levels affordable to middle income Vermonters is lower," explained David White of White and Burke Real Estate Advisors. "Economics just don't work in this sector," he continued.

While the planning in both states advocates for higher density housing in revitalized downtowns, disparities are clear between regional centers and rural downtowns. In rural villages where construction is less viable, housing and economic growth is relatively nonexistent. In larger communities, the construction of new housing is increasing sharply, keeping municipalities busy with infrastructure investments. Lebanon, for example, has instituted a Sewer Development Charge on new projects that compliments funds used to maintain and/or upsize the city's sewer system.

Lebanon's growth, specifically, has been increasing since the pandemic. Between 2010 and 2019, only 667 new units were constructed in the city. David Brooks, Planning and Development Director for the City of Lebanon, wrote over email that, "Over the last 24 months or so, the Lebanon Planning Board has approved about 855 multi-family units... We also just received a formal application for 204 more units... and we anticipate applications for roughly 240 units in the downtown area in the first quarter of 2022." Combined, that's almost double the total number of units constructed in the nine years before the pandemic. Four hundred units are under construction now, with 275 to begin construction in early 2022.

"We are trying to promote housing near job centers and in areas where we already have adequate infrastructure and services so people have transportation options (walk, bike, transit), and we’re addressing traffic issues as they arise," Brooks wrote.

Lebanon City Councilor Devin Wilkie agrees that Lebanon is experiencing signifcant growth, but he adds that it's growth that the city and region need in order to help alleviate the shortage of housing.

"Lebanon is receiving a disproportionately high share of new construction in the Upper Valley. I am grateful Lebanon is able to do its part to alleviate the housing crisis, but I hope other communities can contribute as well, as this is truly a regional concern," Wilkie said.

Thetford (where I live) has been trying to attract multi-family development for years, with little to no success. The economics do not play out.

The pandemic has highlighted this disparity, but it existed previously. The 667 units built between 2010-2019 in Lebanon represent roughly a quarter of the total number of units built in a 29-municipality survey conducted by Vital Communities. Hartford, Sunapee, Newbury, and Hanover were the next largest contributors, in that order. The 24 other communities in the survey had fewer than 100 units of new development in those 9 years (and those were predominantly single family), while the other communities in Vital Communities' service area – another 40 – didn't even respond to the survey.

"There is only one project that I’m aware of [in Lebanon] so far (25 units) that seems to have been killed by the pandemic/cost spikes," Brooks wrote.

"Like inflation in our economy at large, it is too early to tell if increases in material and labor are permanent or transitory," the VHFA study concludes.

What does seem permanent, however, is Lebanon being at the center of regional housing development.