It Costs $500PSF to Build Apartments Here

Finding a solution to the affordability crisis plaguing California is a top concern for both residents and the development community. At RealShare Southern California last week, experts sat down to talk about the affordability problem, what is driving it and why the current proposed solutions—namely the potential repeal of Costa Hawkins—are not going to bring down the prices. The panel, Overcoming the Affordability Crisis, included speakers Jim Andersen, SVP at Trammell Crow Company; Mike Rovner, president and founder at Mike Rovner Construction; Kitty Wallace, EVP at Colliers International; Janet Neman, senior managing director at Charles Dunn Co.; Eric Sackler, director of Los Angeles at Coldwell Banker Commercial, with moderator Jeffrey Hudson, managing director of capital markets at Walker & Dunlop.

The cost of construction and land prices are the biggest cause of the affordability crisis. Andersen estimates that his hard cost expenses are $300 per square foot to develop an apartment building in Los Angeles, and all in, the cost is closer to $500 per square foot. To recoup those costs, Andersen said, “You either build tiny units or swanky places.” At $500 per square foot, rents need to be approximately $4 a square foot, putting rents for an 800-square-foot apartment around $3,200 per month.

“Jim is charging that because he is being forced to,” added Wallace. She explained that the properties priced higher are sitting on the market for months before they are rented, but apartments with $2.50 per square foot rents have a line out the door. Occupancy rates in Los Angeles are 95%, but for less expensive apartments, it is nearly 100%. Properties with $4 per square foot rents have occupancy rates closer to 90%. “We have low end and high end, but most people want something in the middle,” she said.