Why Building Multifamily Rental Units Costs So Much, and What Can We Do About It?

We Are Apartments
Aug 15, 2019 · 4 min read

Real estate and markets expert Paige Mueller explains why building housing is so expensive and points toward solutions.

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The nation is witnessing a crisis level shortage of multifamily rental units. Ideally, the private sector would simply build more units to meet the rising demand. For a number of reasons though, that’s not happening. Why is that?

According to the National Apartment Association’s “U.S. Barriers to Apartment Construction Index,” one of the causes is high development costs makes it difficult to build more units. Paige Mueller, a member of the research team behind the report and an expert real estate analyst with 25 years’ experience, sees the issue as an increasingly complex one given the limitations and constraints, natural and manmade, that developers, local governments and communities face.

Mueller spoke with WeAreApartments.org about why development costs are going up, including as a result of land availability, and suggested ways to help build more apartments, such as reducing the time developers must invest in projects and boosting public-private partnerships.

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Why have development costs risen in recent years, and how has that affected construction for apartments?

That’s not an easy question to answer, actually. When there’s more construction, materials and labor become scarce. And as we move into more mature economic and property market cycles, land costs tend to go up because they’re more in demand. Those are just basic supply-and-demand issues.

Land barriers are another underlying issue. Sometimes it starts with just basic land topography. For instance, the San Francisco Peninsula is surrounded by water on three sides. San Francisco’s population can only grow in one direction, which is south. Other areas have other natural barriers. There are mountains, wetlands, lakes. When we layer population growth on top of land constraints, then we have very specific dynamics taking place in each market.

The bottom line is, land costs are really causing the differences from one market to another. Building costs are going to be a little more expensive in different markets — materials, labor, et cetera. But we see some projects where 60% of the total cost of a project is land and others where it’s 5%. That’s a big variance.

Regulatory environments can also make a big difference in terms of cost.

How so? How can a more accommodating regulatory environment make a difference?

At a high level, we see a correlation between high costs and markets that have very complex regulatory systems. More complexity leads to more uncertainty. If a developer has more uncertainty, they have higher risks and that drives their costs up.

Lots of things can cause uncertainty. There’s the amount of time it takes to get through the process, the number of documents builders have to file. And the longer a development process takes, then the more likely it is something unexpected could happen.

“If it’s too expensive to build and projects don’t get off the ground, then affordable housing needs aren’t met”

How does this ultimately affect the availability of housing people can afford? And what else can help drive down costs?

All of this does more than just drag out the process for developers. The uncertainty and higher costs have other ripple effects for people in the community too. For example, if it’s too expensive to build and projects don’t get off the ground, then affordable housing needs aren’t met, meaning school teachers, firefighters and police officers are unable to find housing in their communities. If you’re asking those people to commute an hour, which many of them are, then that’s just not a viable community.

The other thing that can affect housing is that you have these suburban communities that like the way things are and don’t want density. But as the population grows, sprawling areas are expensive for cities and counties to serve with police, firefighters and utilities, and that can also increase the cost of building projects.

There are definitely examples in some high-cost areas where the government and the developers know there’s a need for more housing and are working together to figure out how to deliver it cost-effectively. By having similar, agreed-upon goals, local planners and developers can eliminate the uncertainty they would otherwise face.

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