Multifamily Construction Costs
Construction costs continue to be one of the greatest expenses for multifamily owners and developers, and it appears that they will only rise. Unfortunately, the industry as a whole may suffer as a result of these rising expenses. In fact, the National Association of Home Builders connected the rise in building costs to multifamily developers' lack of faith in the general market in a 2018 report. It's critical now more than ever for developers and investors to comprehend the precise structure of multifamily construction budgets and the reasons for their steep inflation.
Multifamily Construction Costs Are Rising: Why?
Regulatory compliance, which accounts for a startling 32% of overall expenses, is one of the main causes of the growth in multifamily development costs, according to the National Multifamily Housing Council (NMHC). While some of these laws and regulations (such as the fundamental fire safety laws) are obviously important, many others are overly complicated. Construction prices are rising across the board, not just in compliance costs. In fact, the price of U.S. construction materials increased significantly during the year by a significant 7.4%, which is enough to strain any budget for development. Along with rising compliance and material costs, labor costs and taxes on imported items have grown lately, adding to the upward pressure on building prices.
How to Estimate the Costs of Construction and Development
Multifamily and commercial developers generally use historical data from earlier development projects in the beginning stages of a project, trying to account for parallels and variations in their estimate (much like an appraiser might look at other properties using the sales comparison approach). However, it can be challenging to establish an exact budget, at least initially, due to the continually shifting economic conditions.
In the early stages of a development project, developers, contractors, and architects frequently rely on basic, do-it-yourself cost estimation techniques. In reality, it's simple to find online construction cost estimate templates for Excel that are "plug and play." So long as they enter the appropriate information, these may offer developers a reliable rough cost estimate. However, although DIY spreadsheets are excellent for estimation, most bigger projects will eventually hire a professional construction cost estimator. Although this can be pricey, establishing a precise budget estimate before construction can save developers thousands of dollars.
Construction of Multifamily: Hard vs. Soft Costs
Understanding the distinction between hard and soft costs is crucial if you're trying to estimate or assess multifamily building expenses. All expenses incurred during the physical construction of a structure, such as those for installing foundations, roofing, landscaping, appliances, and similar items, are referred to as "hard costs." Conversely, expenses like permit fees, architectural charges, legal fees, construction loan interest, and fees, as well as other comparable expenditures, are examples of soft costs, which are often intangibles. A property's development costs typically consist of hard construction costs of 37%, soft expenditures of 24%, and site acquisition costs of 19%. (and demolition costs, if necessary). The remaining 25% is distributed to the investors as equity returns.
Developers frequently manage apartment and condo construction projects for a fee but do not contribute the lion's share of the funding. Instead, they typically collaborate with a group of financiers who provide the bulk of the development's funding. Although developer fees are frequently set at 5% of soft and hard development expenditures, they can vary greatly. For example, the developer may add an acquisition fee of 1% to 2% of the purchase price if they also buy the land for the project.
How Much Does Building Multifamily Really Cost?
The most recent cost estimates place the cost of building multifamily apartments between $64,500 and $86,000 per unit. Given that the average contractor cost in the United States is around $125, this estimate assumes contractor fees of between $85 and $200 per square foot (PSF) to provide a reasonable range between the most and least expensive areas. The estimate also includes fees for painters at $20 to $35/hour, plumbers at $45 to $65/hour, and electricians at $65 to $85/hour. Mason, excavator, and carpenter rates are calculated at $70/hour. In contrast, these figures are meaningless in the biggest and most competitive markets in the country. For instance, the cost of building an apartment is currently $330 per square foot in San Francisco and $500 per square foot in Los Angeles.
Architects often cost between 10% and 15% of the total cost of building and development, making them a crucial component of the process in addition to direct construction expenditures. The typical hourly rate for commercial architectural firms is between $125 and $250, while prices can be much higher in major cities.
The cost of unused and inaccessible space must also be taken into account when estimating construction expenses for apartments and multifamily buildings. A multifamily property's unused square footage typically makes up 15% of its total area. Examples of this include elevator shafts, building lobbies, and common rooms. For instance, 1,700 square feet of usable apartment space would really arise from a construction project measuring 2,000 square feet. If the building is a condo, the future owners or renters will almost always be responsible for paying this increase.