Connecticut housing construction is under pressure over affordability, but there’s a new problem on the horizon.

Housing construction in Connecticut that’s dominated by demands to produce more affordable choices faces another problem: a slowdown that could chill economic growth.

Government for years has linked growth to investment in rail and highway transportation, limiting the high cost of electricity and promoting workforce development. Housing is the next big challenge.

“Connecticut, in my opinion, we need to do more of that. We need to do a better job of that, welcoming that type of responsible development, and that could be multifamily. It could be single family,” state Economic Development Commissioner David Lehman said at a September forum at Yale University’s School of Management.

Officials “need to be able to to say we’re going to deliver that” when businesses propose expansion plans bringing workers to Connecticut, he said.

Demand is high for housing, particularly apartments and multifamily dwellings. Building permits in Connecticut rose steadily for three years beginning in 2017, with nearly 3,100 issued and peaking at nearly 5,100 in 2019, according to U.S. Census data provided by the state Department of Economic and Community Development.

It dropped slightly in 2020 as the COVID-19 pandemic swept through the state and fell again last year, to about 3,700 permits. Jim Perras, chief executive officer of the Home Builders and Remodelers Association of Connecticut, said by year’s end the number of housing starts could reach 4,500 to 5,000 in a return to pre-pandemic levels.

Construction is still down

“The larger numbers we’re seeing now our industry is thrilled about,” Perras said.

But housing construction is down significantly from before the Great Recession of 2008-09. In 2004, for example, 11,837 building permits were issued in Connecticut, according to the Census.

“Since 2008, our industry has been building at recession levels,” Perras said.

Now there’s a more recent threat: With the rest of the economy, housing construction is being shaken by inflation and labor shortages.

“Builders’ sentiment nationally has been on the decline for the past nine months in a row,” Perras said. “The sentiment exists in Connecticut as well.”

The U.S. Department of Commerce reported Sept. 20 that 1.5 million building permits were issued in August, down 10% from July and 14.4% fewer than permits issued in August 2021.

Perras said he’s heard anecdotally builders have been busy in the last three or four months, but the phone is “ringing less than what we’ve been accustomed to” in the last few years.

With interest rates climbing — mortgage rates are closing in on 7% — rentals are in demand. It’s so strong, Nelson Construction in Simsbury had to slow down.

“We actually had to stop marketing at different times in the last 18 months because demand was greater than what we can produce,” said President Chris Nelson.

Inflation is driving up costs

Inflation rippling through the economy is driving up costs of nearly all materials, Nelson said, citing plastic, steel and wire. Lumber prices are high, even though they’ve come down from last year when pent-up demand following the pandemic bid up the price, Nelson said.

And competition is fierce for labor, forcing employers to raise wages.

“I give employees 5 to 10% raises twice a year so they don’t go someplace else,” Nelson said.

As a result, the cost of framing a house is about $10 a square foot, up from $3 to $5 recently, he said. Houses selling for $400,000 are now $520,000. “We’re not making more money,” he said.

Demand is strong in Connecticut’s cities as municipal governments look to reverse commutes to suburbs and bring residents back to downtown.

Randy Salvatore, founder of RMS Cos., a Stamford real estate development firm, said he can’t build enough multifamily housing units. Of 270 units in a Hartford development, 160 were leased before they were finished, he said. And that was with increased rents.

Municipal officials, looking to increase the local tax base, have established approval processes that include zoning “for what you’re trying to do, densify downtown,” he said.

Salvatore cited Danbury, Hartford, New Haven and Stamford as pro-growth cities.

“They see the benefits of growing the population in Connecticut,” he said.

Rising costs and a declining population are problems across the Northeast.

“You can’t grow jobs without growing people,” Lehman said. “That means finding new opportunities to expand housing.”

Apartments for young and baby boomers

Builders see rising interest in apartments and are responding. The housing is attractive not only to young people trying to save for a down payment for a house, but baby boomers looking to shed the responsibilities of home ownership.

Perras said local officials can promote affordable housing and boost supply to meet demand by approving zoning rules that allow for greater density. Sharp differences over land use policy “have been around for a couple of decades now and remain to be resolved in Connecticut,” he said.

“A 2-acre lot makes it hard for a starter home,” he said.

Housing advocates in August sued the town of Woodbridge, taking aim at zoning regulations that prohibit multifamily housing of three or more units on residential land lacking access to public water and sewer.

The regulations also require a special review in the rest of the town for multifamily housing, according to the advocates.

In Vernon, nearly 350 building permits were issued in the last three years, a relatively large number for a small town with a population of about 30,000.

“We’re a built-out community,” said Shaun W. Gately, director of the town’s Development Services. “There’s not a lot of room left.”

Vernon is the second largest commuter town, after Mansfield, for the University of Connecticut, drawing faculty, staff and students, he said. The development of mill complexes, construction of multifamily units and “very, very strong demand for apartments” helps account for Vernon’s modest building boom, Gately said.

Greenwich is grappling with environmental issues related to home construction.

“We’re finding out now that infrastructure built 100 years ago can’t handle storms,” First Selectman Fred Camillo said. “Every single project we do has infrastructure and flooding in mind.”

He acknowledged that Greenwich is pricey. “We’d like our town employees to live close by, but it’s hard. It’s very, very expensive,” he said

However, a town priority is to encourage land use plans that account for increasingly destructive storms. Superstorm Sandy inundated parts of Greenwich a decade ago, and planners now look for more green space to absorb water and fewer impervious surfaces that ease water runoff, he said.

Some property owners are pushing back.

“It’s their land. They want to do what they want to do,” Camillo said.

Stephen Singer can be reached at ssinger@courant.com.