• Building Cost Misconception: Overlooking costs like land, utilities, and fees make new construction seem cheaper than it is.

• Vintage Property Value: Older properties in desirable areas with high rents often cost more per square foot than new builds.

• High Land and Development Costs: Total building costs are especially high in highly desirable infill locations when including land and infrastructure, reducing cost-effectiveness.

• Regulatory Challenges: Current building codes often prevent replicating the small vintage units.

• Better Investment Value: Older buildings in prime locations can offer better value than new constructions, considering total costs and regulatory hurdles.

Building New Can Cost More

The illusion of “I can build that for less than it costs to buy!”. Since I have acquired and sold a lot of apartments with very low square footage, I often must explain this to my would-be investors, and once they understand, they become investors. It’s clear that building new is the better option if you can do it for less. But if you look a little closer at how you measure the cost, building new may really end up costing more.

Understanding Vintage Properties in Prime Locations

Vintage properties built from the mid 1960’s to the late 70’s were tailored to singles, it was generally assumed that everyone who got married went out and purchased a home, so no need for two bedrooms or more. These units were often small, even tiny with interior space of less than 500 square feet.

Many of these smaller vintage properties were built in what are now highly desirable in-fill locations where rents are high. The result is their value, on a per-square-foot basis, can be higher than what many investors think they can build them for. For example, I am selling a property for $330 per square foot right now, and I know that sharp developers could build a new complex for around $240 per square foot.

Price Per Square Foot Vs. Price Per Unit

So why would anyone buy a 40+ year old building for more than the cost to build it? Actually, they can’t, and here’s why. The cost to acquire land, improve it with utilities, parking, grading, drainage and often impact fees are upwards of $150,000 per unit (highly dependent on location) and that’s before you frame the first unit. The price per unit of the property I am selling is $136,000 per unit, much lower than its 2022 peak value but still strong given the size of the units.

Today, you can’t really build those units again since there is not enough space in, say, 350 square feet to meet code. Thus, the “I can build it for less” is not always true, even though the per-foot cost seems to imply just that!