A cost decomposition of break-even rents for new multifamily housing development

We decompose the break-even rents of new multifamily housing into three cost components — land prices, construction costs, and financial capital — for 50 of the largest cities in the United States from 2012 to 2020. This is accomplished by combining existing data on land prices and income capitalization rates with a new data series on local historical pricing of required construction components of complete buildings called “assemblies”. For both 3-story, wood-framed buildings and 12-story, steel-framed buildings, we find that construction costs contribute significantly to the growth of break-even rents, and the relative contribution of construction costs exceeds that of land values for the taller buildings. Meanwhile, cap rates have declined, mediating the effect of development costs on the rents borne by tenants. Overall, there is significant variation in rent growth across cities that can be explained by these three cost factors.