Construction Costs Are Still Climbing, and California Affordable Deals Are Feeling It
If you are assembling a capital stack for an affordable housing project in California right now, you already know the punchline: hard costs are not cooperating. Total development costs on Low Income Housing Tax Credit (LIHTC) deals across the state have continued trending upward through mid-2026, with per-unit costs on new construction ranging from the high six figures in inland markets to well above one million dollars per unit in coastal and high-cost jurisdictions. That spread is wide, but the directional pressure is consistent. Costs are moving up, the pace of increases has moderated compared to the 2021 to 2023 spike, but a meaningful reversal has not materialized.
The reasons are layered. Labor remains the dominant driver, and California's regulatory environment compounds what is already a tight construction labor market. Materials volatility has not disappeared either. Structural steel, concrete, and lumber have each experienced their own pricing cycles through the first half of 2026, with lumber showing some relief while steel and concrete costs remain stubbornly elevated in most regions. Developers who locked in GMP contracts twelve to eighteen months ago are in a better position today. Those repricing now are absorbing the current environment with limited cushion.
Prevailing Wage Requirements Are Reshaping Project Pencils
The intersection of federal and state prevailing wage mandates with LIHTC and other public subsidy programs is not a new dynamic, but it is an increasingly consequential one. Projects utilizing 9% or 4% tax credits in combination with state funding sources are subject to wage requirements that add meaningful cost premiums above market-rate labor baselines. Estimates on that premium vary widely by trade and region, but developers and their general contractors consistently describe it as a significant line item that did not exist at the same scale a few cycles ago.
The Inflation Reduction Act's prevailing wage and apprenticeship requirements, tied to enhanced energy and clean energy incentives, have added another layer of compliance complexity. For developers pursuing 179D deductions, investment tax credits, or bonus depreciation strategies alongside LIHTC equity, the interaction of these requirements demands early coordination between legal counsel, the GC, and the tax credit equity partner. Getting that alignment wrong late in predevelopment is expensive. Getting it wrong after closing is worse.
The practical effect is that more projects are requiring higher levels of public subsidy per unit just to maintain feasibility at restricted rents. Local jurisdictions and state agencies are aware of this math. The challenge is that gap funding sources are not expanding at the same pace as per-unit cost inflation, which puts additional pressure on developers to bring creative capital structures to the table.
Cost Volatility Is Changing How Capital Stacks Get Built
When hard costs are predictable, capital stack assembly is mostly a sequencing exercise. You know your total development cost, you size the permanent debt to supportable NOI, you calculate your equity gap, and you go source it. In a volatile cost environment, the exercise becomes more dynamic and considerably more stressful.
Several structural shifts are worth noting for developers active in California right now. First, contingency reserves in construction budgets have grown. Where five to seven percent hard cost contingency was once standard, mission-aligned lenders and equity partners are increasingly comfortable with, and in some cases requiring, contingency levels in the eight to twelve percent range depending on project type and location. That costs equity. Second, construction lenders have tightened underwriting assumptions on cost-to-complete projections, and draw schedules are being scrutinized more carefully. Specialty debt funds and mission CDFIs with affordable housing expertise are often more flexible than conventional construction lenders on structure, but they are not immune to the same cost risk calculus.
Third, the timing mismatch between when costs are locked and when tax credit pricing or agency commitments are confirmed remains a real gap risk. Life insurance companies and agency lenders underwriting permanent financing are pricing to current conditions, but construction cost assumptions embedded in your proforma from six months ago may no longer hold. Developers who are not stress-testing their capital stacks against a range of cost scenarios before committing to a construction contract are taking on avoidable exposure.
Actionable Takeaways for Developers Planning Upcoming Rounds
The current environment rewards early preparation and penalizes late pivots. A few priorities worth building into your predevelopment process heading into the next TCAC or CDLAC round cycles:
Engage your GC earlier than feels necessary. Early contractor involvement on constructability review and preliminary cost modeling is one of the most reliable ways to reduce pricing surprises at construction close. Treat prevailing wage compliance as a design and schedule constraint, not a cost add-on to handle at the end. And build your capital stack with enough flexibility to absorb a hard cost overage of ten to fifteen percent without requiring a full restructure, because that scenario is more likely than it was three years ago.
Financing structures are not one-size-fits-all in this environment, and the gap between a fundable deal and a stalled one often comes down to how the capital stack is assembled and sequenced from the start. If you have a project in predevelopment or entitlement in California, the team at CLS CRE is actively working with developers navigating exactly these conditions. Reach out and let's talk through what your deal needs to get to close.
Trevor Damyan is a commercial mortgage broker at Commercial Lending Solutions with a background in structured finance at CBRE and Marcus and Millichap Capital Corporation. He specializes in bridge loans, construction financing, SBA programs, DSCR loans, and complex capital structures for investors and developers across all 50 states.
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