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As the Costs to Build Apartments Go Up, So Too Does the Number of Small Units

CoStar Market Insights: The Number of Studios Built This Cycle Compared to Last has Increased Fourfold
June 4, 2018
Rendering of the 718-unit Park 12 multifamily tower at 101 Park Plz. in San Diego
Credit: Greystar

San Diego’s relative geographic constraints keep apartment growth modest compared to most major metros across the country. Neighborhood opposition to increased density is often intense and the generally high cost of development creates a financial barrier to outsized growth.

Then there’s the exhaustive entitlement process. In San Diego, entitling a property for higher density often drags on for years at a considerable cost, and permitting fees can run upwards to 40 percent of the development cost. Park 12, which will be Downtown’s largest apartment community when it delivers with 718 units later this summer, took 20 years to build.

Developers bringing new product to market have noted the difficulty in building for less than $275,000 per unit, a number which is considerably higher for some of Downtown’s new luxury units, where building can cost more than $450,000 per unit. They’ve also noted that hard costs associated with vertical construction have gone up almost 50 percent in the last few years alone.

Parking requirements add a further burden to apartment developers. Building the necessary parking can add up to 20 percent of developers’ costs (ranging from $10,000 above ground to more than $70,000 below ground per space). Senate Bill 827 would have helped mitigate that cost by removing parking requirements near transit corridors, statewide. Unfortunately for the bill’s supporters, it did not make it out of committee.

So how are developers addressing escalating costs? One way is by building an abundance of smaller units.

Last cycle, builders delivered more than 15,000 market rate units, of which a mere 413, or 2 percent, were studios. So far this cycle, developers have built more than 20,000 apartment units, of which 1,797, or roughly 9 percent, are studios. They’re also considerably smaller. Studios built during the last cycle averaged 683 square feet. Now? They are about 100 square feet less on average, but at $3.40 per square foot, they’re about 30 percent higher than the overall average for a 4- and 5-Star unit. At Park 12, 18 percent of units will be traditional studios asking an average price of $4.40 per square foot.

Developers have also built a larger percentage of one-bedroom units this cycle. They’ve delivered 7,587 one-bedroom units so far, or 37 percent of all units built, compared with 32 percent of inventory last cycle. The new one-bedroom units average more than $2.70 per square foot. That’s a 10 percent premium over the 4- and 5-Star average.

On the other hand, the number of new two-bedroom units has taken a hit. They account for 40 percent of new units, down from 51 percent last round. And average asking rents in the new twos average $2.25 per square foot, a 10 percent discount to the 4- and 5-Star average price per square foot.

The larger percentage of studios and one-bedroom units has allowed developers to compete for renters, not with interior amenities, but with community amenities. Outdoor space, gourmet kitchens, game rooms, barbeques, infinity pools, wine bars and pet washing stations are but of the few amenities developers have used to entice renters. They have also helped developers pencil out projects by being able to charge more per square foot.

And while demand has generally risen to meet the flood of new inventory that has filled San Diego, among units built this cycle, two-bedroom apartments have the lowest vacancies--near 10 percent--while studios have the highest at 20 percent.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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