Why Are New Apartments So Expensive?

September 13, 2023

AURA has helped to bring nearly 2,800 new multi-family units to Arvada. Most of these are market-rate apartments, and some people have been surprised at the monthly rents at these developments.

We don’t set the rents, our partners do the actual building and management of the projects. Still, we have an interest in keeping housing costs as low as possible.

For many, the rising cost of housing boils down to the core economic premise of supply and demand. If there is a larger supply of housing units to meet demand then costs will go down.

There is a lot of truth to this. There is another thing to consider: the increasing cost of building new apartments.

Over time regulations have been passed to ensure new construction is safer for residents. This is important. New apartment buildings have costs that new single-family home construction doesn’t face.

These costs include more robust and costly materials to support larger multi-story buildings.  Multi-family construction also may require fire suppression systems and dedicated parking lots or garages.

These requirements make buildings safer and ensure new developments meet community needs and standards. They also add cost to the construction which then passes on to the renters.

Land costs are also high for multi-family development because zoning rules limit where it can be built.

The average national cost for multi-family developments is getting close to $400 per square foot. It can be higher in markets like Arvada where labor shortages in some trades lead to higher salaries. Currently, an average 800-square-foot apartment costs $300,000 or more to build.

This high price leads to many new market-rate apartments in the $2,000 a month range.

Some see any apartment at this cost as a luxury apartment, no matter the included amenities. Some even argue that these new apartments drive up the price of old housing stock, something multiple studies have shown to be untrue.

It may all seem like bad news. If the cost to build new housing units leads to a $2,000 monthly rent, then does that mean there is no good news when it comes to housing?

There is a silver lining. Adding new apartments may not lower housing costs in the short term. However, it can slow the growth of housing costs over time. Housing economist Jay Parsons has documented that housing costs have grown at a slower rate than other communities that have added new multi-family developments.

This means that as developers build new housing options costs may grow at a rate slower than inflation. Over time housing will take up a smaller portion of monthly budgets making it more affordable.

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