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.

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2 thoughts on “When Does More Expensive Construction Make Sense?

  1. Joseph E

    Interesting article on the costs of mid-rise and high-rise construction in Downtown LA:
    http://www.ladowntownnews.com/news/is-downtown-s-low-rise-building-spree-hurting-the-community/article_0e5f97ec-eb52-11e2-a694-0019bb2963f4.html

    Building codes limits buildings to 7 stories unless they use more expensive steel and concrete construction. But to build over the 6 story floor-area-ratio limit, developers have to jump thru a bunch of hoops to include community benefits, and then they still only a FAR of 13, so only 1/2 of the lot can be developed as a 20+ story high-rise. Or they can buy air-rights. But each of these options still takes 4 times as long to plan and permit as a standard 6 story “podium” building. All this drives up the cost of high-rise construction.

    But building higher does not necessarily have to be more expensive. According to this post, 11 to 20 story office projects are on average 20% cheaper per square foot than 2 to 4 floor buildings. In Los Angeles, they cost $167 per square foot (in 2011), versus $186 per square foot for low-rise.
    http://evstudio.com/price-per-square-foot-construction-cost-for-multi-story-office-buildings/
    Los Angeles is listed at

    Similarly, this document suggests total costs (including land and financing) at $206 per square foot (in 2004) for high-rise (20 story) apartment construction in Irving, California: http://www.humphreys.com/wp-content/uploads/2013/02/MFT_FL-04.pdf
    At that price, a 1000 square foot apartment could sell for $300,000 with a good profit margin; not as cheap as a 3-story wood-frame dingbat, but not the $700 per square foot that you mentioned above.

    Reply
    1. letsgola Post author

      Thanks for the links and the interesting data. For offices, it shouldn’t be too surprising that costs decline a little for taller buildings, since offices are almost always built as steel/concrete construction (though obviously taller buildings will require larger members and more robust foundations). Construction costs of $155/SF-$185/SF for high rises seem low relative to costs for mid-rises that I’ve seen elsewhere, including that LA Downtown News article, though that’s not my area of expertise. If you start w/ the RS Means number of $185/SF, tack on land costs of say $50-$100/SF, and add, say, 10%-20% for design and permitting, you’re probably not far from the low end of what the developers claim ($300-$500/SF).

      There are clearly non-linear costs when you go from wood to concrete & steel. Concrete requires curing time. Steel work in LA requires intensive design and inspection, as well as qualified labor, to meet seismic code requirements for joints between members. With wood, you might be able to increase productivity because you can prefabricate assemblies and the connection details are less intense. Nevertheless these sources are an interesting contrast to the narrative you hear from developers about how much more costly it is to do high-rise construction.

      Reply

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