Pedestrians walk past a construction site in downtown Berkeley
Pedestrians walk past the Identity Logan Park apartment complex under construction at the intersection of Shattuck Avenue and Channing Way. Credit: Ximena Natera, Berkeleyside/CatchLight

Berkeley could see its pace of new housing construction slow in 2023 — though there are signs builders will be more active here than in other parts of the Bay Area.

High interest rates and sharp increases in materials costs have slowed home building across the country over the past several months, and have stalled just about all new market-rate projects in San Francisco. Those factors haven’t had as much of an impact on new development in Berkeley so far, however, because the need for student housing means that despite the current headwinds builders see plenty of money to be made on projects near campus.

“Berkeley is doing better because it’s still got built-in demand from Cal,” said Patrick Kennedy, a developer who has built projects around San Francisco and the East Bay.

City officials similarly say they’re still hearing plenty of interest from developers who want to build in Berkeley.

“We’ve continued to see a high volume of housing projects moving forward — driven in large part, I think, by the student housing market,” Berkeley Planning Director Jordan Klein said in an interview. “Our local market is a little bit different than the regional market as a whole.”

Berkeley’s astronomically expensive real estate market has cooled slightly amid rising interest rates, with the city’s median home sale price declining from $1.8 million last April to $1.3 million in November, according to Redfin.

When it comes to new development, Kennedy and two other developers — Nathan George of NX Ventures and Bill Schrader of the Austin Group — predicted downtown Berkeley and the Southside neighborhood near campus will continue to see new apartments break ground even if construction stalls elsewhere.

But they said that might not be the case in neighborhoods farther from UC Berkeley, where projects are less likely to tap into the student market.

“Projects that don’t have a built-in, recognizable demand are going to be very, very hard to finance,” Kennedy said.

George cited the San Pablo Avenue corridor in West Berkeley, which he and other developers are hoping to line with new apartments, as an area that could feel the slowdown more acutely.

“You might not see anything get built there for a while,” George said.

The projects that are most likely to be affected are those that have made it through the city’s approval process and are now looking for financing they need to start building.

City officials have approved plans for a six-story apartment building at what is now a vacant lot at 1201 San Pablo Ave., but the project has not yet broken ground. Credit: Ximena Natera, Berkeleyside/CatchLight Credit: Ximena Natera, Berkeleyside/Catchlight

Materials costs have risen 25% to 30% over the past couple of years, said Schrader, whose firm is building two projects downtown along Shattuck Avenue. Meanwhile, Kennedy estimated that spiking interest rates, which soared as regulators moved to curb inflation, have added $30,000 to $50,000 to the cost of each new unit. Those costs eat into profit margins developers and investors want to see to consider a project worth building.

Many investors, Schrader said, have decided to “put their pencils down and wait to see if things sort of settle down.”

There isn’t any indication these challenges will disrupt construction that has already gotten started, like some cities saw when the housing market tanked during the Great Recession. Instead, the developers said some vacant sites that had seemed poised for development might wind up sitting empty for longer than expected as builders wait for interest rates to come back down.

“At a minimum, it’s probably going to delay projects,” Schrader said. “At a maximum, there probably will be projects that don’t move forward.”

Meanwhile, the current economic conditions aren’t likely to disrupt several high-profile projects that are in the planning stages now, such as the effort to build homes at the Ashby and North Berkeley BART stations, and three apartment towers of 25 stories or more that developers have pitched for downtown. Builders say that’s because it will likely be several months or years before those projects are ready to seek financing and break ground — by which point interest rates and other factors could look friendlier to their bottom line.

“We’re hopeful that things are better then,” said Kennedy, who has several projects in the city’s approval process. “We have some time.”

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Nico Savidge joined Berkeleyside in 2021 as a senior reporter covering city hall. Born and raised in Berkeley, he got his start in journalism at Youth Radio as a high-schooler in the mid-2000s. Since then,...