Why you should Understand Multifamily Construction Costs
- Whether you want to get your hands dirty with a massive real estate development project, or you simply want to passively invest in apartment construction or rehabilitation, understanding multifamily construction costs is essential.
- Though costs vary significantly by area, understanding national and local cost averages for contractors, subcontractors, architects, materials, and other expenses can help you ensure that you aren’t grossly overpaying for any part of your project. Perhaps just as importantly, you can make sure you aren’t investing with a developer who doesn’t place a priority on effective budgeting.
For multifamily investors and developers, construction costs remain one of the biggest expenses, and it looks like costs are only continuing to increase. Due to these ballooning costs, it’s more important than ever for developers and investors to understand the exact nature of multifamily construction budgets, and why they keep rising so quickly.
Why Multifamily Construction Costs Are Rising
According to the National Multifamily Housing Council (NMHC), regulatory compliance is one of the biggest reasons for the increase in multifamily development costs, counting for a staggering 32% of overall costs. While some of these rules and ordinances are clearly necessary (i.e. basic fire safety regulations), others are often needlessly complex. In addition to compliance and materials costs, labor costs have also dramatically increased per COVID, along with tariffs for imported goods, putting added intense upward pressure on construction prices.
1. How Construction and Development Costs Are Estimated
- In the initial stages of a project, multifamily and commercial developers will typically utilize historical data from previous development projects, attempting to account for similarities and differences in their estimate.
- While historical data is great for estimation, the vast majority of larger projects will bring in a professional construction cost estimator later on in the process. Though this can be expensive, getting an accurate budget estimation before breaking ground can often save developers thousands of dollars in the long run.
2. Hard vs. Soft Costs for Multifamily Construction
If you’re trying to estimate or analyze multifamily construction costs, it’s essential to understand the difference between hard and soft costs. Hard costs include all costs related to the physical construction of a building, including laying foundations, roofing, landscaping, appliances, and the like. Soft costs are typically intangibles, and include expenses such as permit fees, architectural costs, legal fees, construction loan interest and fees, and other similar expenses.
On average, about:
- 37% of a property’s development costs are hard construction costs
- 24% are soft costs
- 19% can be attributed to land acquisition costs
- The remaining 25% goes the investors in the form of equity returns.
In many cases, developers manage apartment and condo construction projects for a certain fee, but do not provide the majority of the capital. Instead, they usually partner with a group of investors who finance much of the development. Developer fees can vary significantly, but they are often set at 5% of soft and hard development costs. If the developer also acquired the land for the project, they might charge an additional acquisition fee of 1-2% of the purchase price.
3. How Much Does Multifamily Development Actually Cost?
- According to the most recent cost estimates, multifamily apartment construction currently costs between $74,500 to $96,000 per unit. This estimate uses contractor fees of between $95 and $200 per square foot (psf) to provide a reasonable range between the most and least expensive markets.
- In addition to direct construction costs, architects are also an essential part of the construction and development process, and will typically account for about 10% to 15% of the entire construction and development budget.
- When calculating apartment and multifamily construction costs, it’s also important to factor unusable and inaccessible space. On average, about 15% of the square footage of multifamily property consists of unusable space such as elevator shafts, building lobbies, and common areas. For instance, a 2,000 square feet of construction, would, in practice, only result in 1,700 feet of usable apartment space.
4. Architects’ Role in Multifamily Development
While contractors are responsible for supervising and hiring workers to physically build out a property, architects are responsible for creating detailed plans for the entire development. In many ways, a building is only as good as its plan, so choosing a quality architect is of the utmost importance. The responsibilities of an architectural firm include:
- Create an initial plan and budget for the project
- Create a work list and plan outline
- Draft schematic designs and floor plans
- Help the developer with reviewing contractor bids and selecting a contractor
- Review architectural plans with relevant agencies, and obtain needed permits, including general construction permits (some permits may later become the responsibility of the contractor)
- Collaborate with structural engineers and planning agencies
- Monitor the contractor’s progress and payment requests
5. Contractors’ Role in Multifamily Development
Choosing the right contractor is essential, as they’re responsible for the day-to-day management of the construction site. Choose a good contractor and your project will likely go smoothly, and, assuming your initial construction cost estimate was accurate, within budget. Choose poorly, and you may find yourself well behind schedule and over budget– which can be disastrous, especially since most multifamily development projects are financed with construction loans, which must generally be repaid within a limited timeline.
Overall, the responsibilities of a contractor generally include:
- Sourcing and purchasing all materials and services to build the property, start to finish
- Obtaining all relevant construction and utility permits
- Advising the owner/developer and the architect on the best ways to decrease costs and reduce project timelines (while maintaining or improving quality)
- Selecting, hiring, and supervising subcontractors
- Cleaning the entire property after construction is complete
Contractors are typically responsible for sourcing and installing all building elements, as well as taking care of certain administrative functions.
As a well informed investor, developer or builder, what you know makes all the difference in the world whether you turn a profit.
If you are looking for land for your next investment, contact us to discuss the next steps to get you on the path to your profitable return.
