The Causes and Consequences of Development Costs: Evidence from Multifamily Housing

35 Pages Posted: 28 Sep 2022

See all articles by Michael D. Eriksen

Michael D. Eriksen

Purdue University - Department of Economics

Anthony W. Orlando

California State Polytechnic University, Pomona - Finance, Real Estate and Law Department

Date Written: September 20, 2022

Abstract

We estimate the elasticities of break-even rents of new multifamily housing with respect to land prices, construction costs, and financial capital in the largest 50 cities in the United States from 2012 to 2020. This was accomplished by combining existing data on land prices and capitalization rates with a new data series on local historical pricing of required construction components of complete buildings called assemblies. While prices of residential land have more than doubled over this period, such increases have had only a relatively minor role in explaining increases in break-even rents of multifamily buildings and have been more than offset by decreases in capitalization rates. In contrast, construction costs of 3-story wood framed buildings have increased by 20% and 12-story steel framed buildings by 13% over this period and explain a greater share of the increase in break-even rents. The paper concludes by estimating how the prevailing wage premium required on federally-subsidized projects impacts construction costs and break-even rents across each of the cities.

Keywords: real estate development, construction costs, land prices, cap rates, multifamily housing

JEL Classification: R31, D24, M21, J30, J38

Suggested Citation

Eriksen, Michael D. and Orlando, Anthony W., The Causes and Consequences of Development Costs: Evidence from Multifamily Housing (September 20, 2022). Available at SSRN: https://ssrn.com/abstract=4225004 or http://dx.doi.org/10.2139/ssrn.4225004

Michael D. Eriksen

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

Anthony W. Orlando (Contact Author)

California State Polytechnic University, Pomona - Finance, Real Estate and Law Department ( email )

United States

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