How to Determine Cost of New Development

Question

Hi Everyone,

I'm in the LA / Hollywood / Beverly Hills area and along with an investor, we're looking at building a new multi-family development.

There are several listings with lots that already have approved plans (and some without). For the most part, I have enough market data to put together a decent business case for making the investment (land values, rental data, local re estate market, etc) The one piece I'm missing is the cost of building the new building to spec.

How do I find the cost of building a 4 to 15 unit multi-family property in the areas I'm looking? And does anyone have any good resources that describe the process of building a new development?

Thanks!

Rich Weese · Answer

Emily,
     It would be fun to see what the homes I lived in , in Placentia, Yorba Linda and Brea and what they would sell for now. I should have kept them?? My first office was in Placentia where I began my career! Rich

J Scott · Answer

If you want a detailed/accurate estimate, you'll probably want to get your hands on the plans and get the work bid out.

But, if you're just looking at a ballpark figure, you can probably call around to some builders in your area and ask them what they're seeing in terms of per-square-foot new construction costs.  Keep in mind that you'll get a large range, as every builder will use different subs, different finishes, etc. -- but you can probably find out if it's in the $100/sf range, the $200/sf range, the $300/sf range, etc.

Rich Weese · Answer

Where are you building in Placentia? My first junker office was in the 200 block of south Bradford-a real dump. I also lived in 16181 Tunisia and 2019 Teodoro (nice home with pool). I'm sure you're building in much more recently developed subdivisions. Good luck. Keep BP posted. Rich

Emily Dixon · Answer

It would have been more fun Rich Weese to see what your yorba linda houses would have sold for in 2005 or 2006. It was insane over there! tiny old houses 400-600k disgusting!

Emily Dixon · Answer

Rich Weese
I am building a house in placentia, ca. My cost is $80.sf but that is because i have my own skilled labor force. You may laugh but houses out here sell for $240-270sf!!! SO if you add 400 sf to a house even at @$120sf(general contractor price) you have increased the value of the house (on the low side) almost 50k out here.

J Scott · Answer

Given that there very successful builders who build apartment buildings in areas where construction prices are $100, $200 or $300 per square foot, it seems logical that yes, you can make money doing it.  Unless these large-scale developers are just throwing their money away (which I guess is possible).

Rich - I'm guessing that you are accustomed to 10-12% cap rates in the areas where you build.  You're also probably not accustomed to small apartments costing $3-5K/month.  But, in areas where construction costs are significantly higher, expected cap rates tend to be significantly lower and gross income tends to be significantly higher.  Which would account for how it's feasible to build in those areas.

Let me throw out some very basic numbers from my experience:

-  When I first lived in Northern CA, I was renting a 1000 sf apartment for $3500/month.

-  That's $3.50 per sf per month, or about $42 per sf per year.

-  Let's say that 20% of the square footage is devoted to unusable or common areas.  That means that the average gross income per sf of the structure is about $33.50.

-  Let's use the 50% rule to estimate NOI at $16.75 per sf

-  If you build at $200/sf, that's a cap rate of about 9%, not including land costs.

Typical expected cap rates in that area are 5-6%, so that's your margin for land costs.

Those numbers wouldn't make me happy, but for investors in that area, the numbers seem to work.  Like I said, I think it depends on your expectations for return.

Emily Dixon · Answer

Joshua! Hello! Fellow southern californian here too!

I always go to lots that were tear downs or burnt down because the utilities are already there.

DO NOT FORGET TO GET WITH EVERY UTILITY COMPANY TO GET REAL COST OF RUNNING UTILITIES IF THIS IS COMPLETELY UNDEVELOPED LAND.

I have seen those lots on MLS I think I know which you are speaking of I have been watching them. BE CAREFUL! Remember if they have "already approved plans" that they figured out it would be too inequitable to build and sell themselves, so make sure if you want to do this you also ask city what entitlements will be.

I am a big advocate of building, but only because i am in a family of builders so have a low sf building cost.

Also this is hollywood- are the houses on hills? Grading and excavating will be big $$ cost.

Don't go into anything too lightly and yes it takes a LONG time and LOTS of research to properly develop a property.

If you were building a new house (where utilities are already ran) you will be getting 120-140 sf cost from general contractor. This is not including all the costs of getting the property ready to build and those hilly los angeles neighborhoods can be excruciating. You need a lot of capital to develop something like that. Honestly that can increase another $80 sf or so.

Here is another angle for you. Cities in california all have one thing in common right now. California took away the redevelopment agency money but still left rigid requirements for them to build afforadable housing. If you work with the city planner and develop affordable housing sometimes they will give breaks on entitlements. Talk to the CITY they want help and they love people building nice things in their cities. MAKE FRIENDS AT THE CITY #1 important overlooked for new developers.

Joshua McGinnis · Answer

@Rich,

Do these apartments you speak of in Texas/Utah rent for $3-$6K a month? That's the difference. I'm near Beverly Hills where a decent-sized apartment can cost this much.

- Joshua

Rich Weese · Answer

I'm sorry, but I still chuckle when I see $100, $200, or $300, per square foot prices! Can someone really make sense on an apartment building paying $100 a square foot? As I've stated before, come join us in Texas for $60 a square foot or southern Utah for $80 a square foot. And these are not for crackerbox apartments but custom single-family residences with most of the nice upgrades!

I'd be truly interested in seeing the results of your study as to how much these apartments are going to cost and what you expect to rent them out for. Unless you are absolutely stealing the dirt I just don't get it. Rich

Account Closed · Answer

hi joshua -

can you give a sense of the building? e.g....how many stories? what is the footprint? what is the total SF? underground, first floor or surface parking? luxury / mid / low rent?

these data will help narrow where you fall in the 100/SF to 200/SF.

thanks!
bryan

How to Determine Cost of New Development

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