Daily Archives: November 18, 2013

When Does More Expensive Construction Make Sense?

One of the most common criticisms of things like Portland’s Urban Growth Boundary is that they increase housing costs. This is undeniably true, at least on a per SF basis, because denser construction costs more. While prowling around Save Marinwood and Quiet and Safe San Rafael, I found a presentation by John Burns that gives relative costs of construction: about $60/SF for SFR, about $90/SF for garden apartments, and about $200/SF for podium construction. While you might be able to save on transportation costs by living closer to your job, in general the tradeoff you make is accepting a smaller dwelling in exchange for living in a more desirable area.

Still, even with no urban growth boundary to speak of, at some point, agglomeration effects cause prices to rise to the point where more expensive types of construction make sense. See, for example, Los Angeles. When does that happen?

As part of trying to keep track of larger trends, I’ve started following the suburban development homes being offered by the major builders. Partly, this is because others (like Curbed) are already keeping good tabs on development in LA and Orange County. But also, urban redevelopment projects tend to be more unique, depending on the specific developer goals, location, land costs, difficulty of permitting, and so on. In the suburbs, we can look at projects in different communities by the same developer, which makes it easier to compare costs across communities, or we can look at projects in the same community by different developers, which makes it easier to compare developers.

D.R. Horton is a major builder in the region, as of early November it had 25 developments in progress in LA, Orange, San Bernardino, Riverside, and Imperial Counties. Of these, 14 were in Riverside County, highlighting the uneven nature of the recovery. D.R. Horton’s most affordable properties, in Adelanto and Imperial, are selling for about $100/SF, around 165% of construction costs.

Therefore, assuming that zoning allows for it, and market conditions and regulation don’t favor buying over renting, that means garden apartments become economic when prices hit about $150/SF, and podiums when prices hit about $330/SF.

The threshold for garden apartments is pretty low; based on D.R. Horton’s SFR pricing, they already make sense in places like Fontana and Murrieta. Podium construction has a higher threshold; Santa Clarita is getting close, and LA and Orange County pencil out. Note that this is a gross simplification. Small (1-2 person) households often don’t want dwellings as large as SFRs. In a place like Adelanto, a lot of single people could be accommodated in things like garage apartments, let rooms, and so on, if permitted. At small sizes, prices don’t scale linearly because of fixed costs like bathrooms and kitchens, which are more expensive per SF than bedrooms or living rooms.

However crude it is, this analysis is consistent with the expectation that there is a logical progression of densities as you approach more desirable areas: SFRs to garden apartments to podiums.

I should point out that by this logic, high-rise construction doesn’t make sense until prices go above about $700/SF – a level that almost nowhere in Los Angeles has reached. Not to beat a dead horse, but I feel compelled to again emphasize that the debate is not about the aesthetics of mid-rise versus high-rise construction. It is affordability versus unaffordability. If your vision is high-rises instead of mid-rises, your vision is an unaffordable Los Angeles. There’s no two ways about it.