Why Economy Housing is not Profitable to Build

Walk into any car dealership today, and you'll find options spanning every budget. Want basic transportation? A new Kia Sorento will reliably move five people for $33,405. Prefer luxury? The Lexus RX delivers premium comfort starting at $50,475. Both manufacturers turn healthy profits despite targeting completely different market segments.

So why can't we apply this same principle to apartment development? Why isn't there a thriving market of "economy apartment" builders creating no-frills housing at significantly lower rents? This week’s edition of the Ridgeview Report seeks to explain why.

The automotive analogy breaks down immediately when you examine cost structures. Car manufacturers benefit from massive economies of scale, global supply chains, and variable material costs that can be dramatically reduced for economy models. Remove the leather seats, downgrade the sound system, simplify the dashboard—and you've meaningfully reduced your production costs.

Apartment construction operates under entirely different economics. Let me walk you through the four critical factors that make "economy" apartments prohibitively expensive to build in major markets.

Reason #1: Land Costs Don't Discriminate

Unlike manufacturing cars, building housing requires one very expensive component: land. That prime urban land? It costs the same whether you're building affordable housing or luxury condos. This single factor alone can represent 20-30% of total development costs, creating an immovable floor that no amount of value engineering can eliminate.

The math is particularly brutal in high-cost markets. In markets like San Francisco or Manhattan, land costs can exceed $150,000 per unit before you've poured a single foundation. No amount of laminate flooring and basic appliances can overcome that foundational cost burden.

Reason #2: Construction Labor Can’t Be Sourced Abroad

Kia can manufacture vehicles in lower-cost countries with competitive labor rates. Apartment developers don't have this luxury. Every project requires local electricians, plumbers, and contractors who demand comparatively higher wages. These labor costs typically account for 50% of total construction costs. Additionally, a skilled electrician charges $100 or more per hour, regardless of whether they're wiring a luxury penthouse or an affordable unit.

Reason #3: Economies of Scale Hit a Wall

While car manufacturers can spread R&D costs across millions of vehicles, apartment developers face severe limitations on project scale. Zoning restrictions, neighborhood opposition, and infrastructure capacity constraints typically cap projects at 200-400 units in most markets.

Compare this to automotive production, where manufacturers amortize design and tooling costs across hundreds of thousands of identical vehicles. Even the largest projects rarely exceed 500 units, limiting the ability to negotiate comparable volume discounts on materials.

Reason #4: The NIMBY Factor

Every apartment project faces intense scrutiny from existing homeowners, who view new development as a threat to their way of life and the character of their neighborhood. Sadly, this opposition intensifies for low-frills housing projects with lower rent. These political realities add additional risk for developers trying to build housing for lower-income tenants.

Looking Ahead: The Solution is Simple

The solution to housing affordability isn't finding ways to build "cheaper" apartments—it's building as much housing as possible, at every price point. Jay Parsons has highlighted the phenomenon that academics call "filtering," where luxury apartment construction actually helps Class C rent affordability through market dynamics.

Here's how filtering works in practice: When we build luxury apartments, higher-income renters move up from Class B properties. Those vacated Class B units then become available to Class C renters seeking better accommodations. This creates a cascade effect, as new supply forces property owners across all classes to compete more aggressively.

We are witnessing this firsthand in Austin, Texas, during the ongoing construction boom and oversupply situation. As new luxury properties have oversupplied the Class A market, owners have aggressively cut rents to achieve stabilized occupancy. With those Class A rents coming down, so too did Class B and C rents as well. This proves that supply—even luxury supply—creates affordability benefits throughout the housing stack.

Final Thoughts

The key insight for policymakers and investors alike: rents are falling where supply is going in big numbers, and rents are rising where supply is limited. Fighting luxury development in the name of affordability actually makes affordability worse by constraining the filtering process that naturally creates more affordable options over time.

The apartment industry lacks a "Kia equivalent" not due to lack of demand or developer creativity, but because of four fundamental structural barriers: inflexible land costs, local labor requirements, limited economies of scale, and political opposition. These factors create an economic floor below which new construction cannot profitably operate without subsidies.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.