Portland: construction costs and rents
An itemized bill
What makes Portland’s new apartments so expensive? Michael Andersen, Sightline, August 2018.
The value of a new rental building is the value of the future rents. So whenever a new rental building is built, you can think of it as the future renters hiring a builder, since it’s their rents that will pay for it.
Michael Andersen has a detailed breakdown of the costs that go into building a new market rental building in Portland, in 2016 or 2017. This particular building is owned by a teachers’ pension fund. Link to spreadsheet.
The largest component is materials and labour (“housing materials & construction labor”). Paying for land (“previous landowner”) is pretty obvious - in Vancouver it’d be a larger share.
Building a rental building requires capital, which means lenders who have to be paid.
There’s interest and fees on loans for land and for construction (“construction & land lender”).
And there’s also equity investors (“short-term real estate investors”). “They own the building until it is sold to a long-term landlord. They write the checks that cover costs during the four-year lead-up to a big project. In exchange, they get a slice of its resale proceeds.”
The impact of approval delays
Compared to Vancouver, 237 days in Portland doesn’t seem that bad. It’s amazing to hear that Houston takes 28 days or less.
For a project like the Cordelia Apartments, every day a building permit awaits approval adds $4,825 in interest to a project that will have to pay back its lenders and investors, plus (in recent years) another $4,371 as construction costs climb. Each day of that process adds about 25 cents to the future monthly rent of each new apartment.
Over the past 15 years, the median building permit for a large apartment building in Portland took 237 days to review. That’s because each permit must be reviewed by 13 separate groups or bureaus, each with its own stack of rules. The back-and-forth takes months.
So I got numbers from Houston, which in 2015 redesigned its system so all city staffers could review plans digitally and simultaneously. (Portland has been promising a system along these lines since 2010; after numerous software delays, it’s expected by 2019 at the soonest.) Over the past three years, the slowest of Houston’s 5,974 new commercial building permits took just 28 days to process. If that were Portland’s average, the monthly rent in each new building might be $61 less.
Another benefit: a shorter processing period would also help projects avoid hitting the market when they aren’t needed, which could make buildings with thinner profit margins more viable.
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A similar breakdown for Seattle, by Dan Bertolet, November 2018.