Watch for multifamily construction costs to go up and up

April 24, 2017 | By

Multifamily construction costs are on the rise. They have been escalating for the past few years. And it’s no surprise that constructing these buildings is fairly expensive.

More new apartments are being built as well. So much so, that some markets are accumulating an oversupply. But that doesn’t necessarily mean that renters shopping for a newly built apartment will have an easy time finding something affordable.

Those findings are in Fannie Mae’s Multifamily Market Commentary for March.

We are expecting to see nearly 404,000 apartment deliveries in 2017. That’s up from approximately 343,000 apartment-unit deliveries last year. However, just a handful of metropolitan markets account for a disproportionate share of the total nationwide.

In 2016, New York City, Washington, DC, Boston, Los Angeles, and San Francisco combined accounted for about 79,000 of the total apartment deliveries. This year, they will have around 81,000 deliveries. These major gateway markets tend to be more expensive than other parts of the country. And they are places where much of the construction is occurring in the Class A tier, where rents are high.

A Strong and Steady Rise

Data from RSMeans — which we are using with permission from Gordian — suggest that multifamily construction costs have been increasing at a fairly strong and steady pace. The data show that the average cost of constructing a new multifamily building here in the U.S. between eight and 24 stories was nearly $32 million in 2016. That was an increase of more than 10 percent in two years alone.

In fact, the cost of construction for all types of multifamily buildings has increased every year over the past four years. And 2017 is not expected to be any different. RSMeans estimates the cost of constructing a building with 8 to 24 stories will average $34 million this year. That’s about a 20 percent increase in only a few years.

Multifamily construction costs fall into two categories – hard and soft. Hard costs include the actual building materials, equipment, and other supplies. Soft costs reflect engineering and architectural costs, labor costs, and other miscellaneous fees.

Increases in both categories account for the recent cost run-up. Soft costs account for almost a quarter of the total construction costs for a taller building.

Watching the Top Gateway Cities

The top four metros for new multifamily construction tend to have higher construction costs than the nation as a whole. In 2016, costs for eight- to 24-story buildings averaged $41.4 million in New York City, $38.8 million in San Francisco, $37.6 million in Boston, and $33.7 million in Los Angeles. All exceeded the national average of $32.5 million.

Among the leading gateway markets, only Washington, DC at $31.2 million, fell below the national average — although just slightly. Even with all of the construction that has been taking place in the area, the city’s multifamily construction costs remain a relative bargain. This is likely one of the reasons multifamily construction has taken off in the nation’s capital in the past few years. Increased net migration, job growth, and a rising renter population have also helped boost activity.

Cost Moderation Unlikely Soon

We are carefully watching the balance between supply and demand in these multifamily hot spots. And we expect most of them to become oversupplied over the next 12 to 24 months. But we don’t expect to see a moderation in construction costs.

Land costs are the only variable that may decline. But for that to happen, developers would have to back off from new acquisitions. And other constructions costs — including lumber, concrete, and steel — simply do not depend upon rental supply and demand.

More likely, costs will remain elevated, as RSMeans has projected. And the multifamily market will see the pace of development start slowing in late 2018.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

 

 

 

 

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