Building affordable apartments

[James McGovern]

In my market all of the new apartment builds have targeted $3,000 a month rent which is fast becoming unaffordable for many. Has anyone figured out how to build multifamily targeted at more modest rental prices and make a decent profit?

[Chris Seveney]

Quote from @James McGovern:

In my market all of the new apartment builds have targeted $3,000 a month rent which is fast becoming unaffordable for many. Has anyone figured out how to build multifamily targeted at more modest rental prices and make a decent profit?

Before asking how to build more affordable multifamily, you have to look at why new apartments are so expensive. It usually comes down to three things:

1. Land costs – In most major metros, land is already priced for luxury-level rents. If the dirt costs $X, the project has to pencil at $3,000/month or more to make sense.

2. Permitting and design – Entitlements, zoning variances, environmental studies, architectural reviews, and NIMBY opposition all add time and soft costs. The longer it takes to break ground, the higher your carry and the more equity you need.

Construction inputs – Labor and materials haven’t returned to pre-COVID levels, and with insurance and interest rates rising, the spread just gets tighter.

You can solve #3 by building with lower quality materials and smaller units, but you cannot overcome #1 and #2 in most instances.

The only way to really build affordable housing that cash flows is to do it in areas where land is still affordable, permitting is less burdensome, and there’s demand for workforce housing. That’s why you see more success stories in the Southeast, Midwest, or tertiary markets — not urban cores of high-cost states.

Some developers are experimenting with modular or manufactured housing to bring costs down, but even then, zoning and land prices remain the gating factors.

Until land, policy, and entitlement timelines shift, “affordable” new construction in expensive markets is a tough ask without subsidy.