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Apartments are shrinking. Are building costs?

THE AVERAGE apartment size Bozzuto Construction Company built between 2008 and 2010 was 960 square feet. Today, of the 4,100 units it has under construction, the average size is 866 square feet, according to Bozzuto Construction President Mike Schlegel.

The reduction in apartment size has occurred as a result of demographic trends, unit mix and, of course, costs. Significant inflation in the investment needed to build multifamily housing is increasing; however, reducing the apartment square footage is not the cure-all some might expect, Schlegel says.

Take, for example, reducing an apartment from 850 net rentable square feet per unit to 650 net rentable square feet per unit.

This likely would reduce construction hard costs by $10,000 to $20,000 per unit (depending on whether it is a concrete or wood-frame building). Assuming a total replacement cost of $300,000 per unit for a high-rise or $200,000 per unit for a mid-rise, this would only result in a 5 percent to 7 percent increase in return on costs (e.g., an 8 percent return would become approximately an 8.5 percent return on costs). But this assumes the owner gets the same rent for a 650 square foot unit as it would for an 850 square foot unit. Not likely!

The reason for only a disproportionally small reduction in construction costs is that kitchens, bath moms, lobbies, corridors and amenity spaces are the most expensive part of any project.

Reducing square footage in an apartment often occurs in the middle of the living room or bedroom--the least expensive spaces to build.

So, it is not advisable to reduce apartment sizes simply to reduce cost. The decision must be driven by other factors. For instance, if your site is FAR constrained, reducing unit size could yield more units. Demographic trends could also be a driving factor.

As the economy improves, more people may prefer to live by themselves instead of with a roommate, which will increase the number of smaller one-bedroom units in demand.--Bozzuto's Winter Newsletter

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Title Annotation:Development
Date:Mar 1, 2013
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