Why It Costs So Much To Build in New York City

New York City has a massive undersupply of housing, which drives up prices and exacerbates the affordability crisis. That is not news to anyone searching for an apartment. The citywide vacancy rate — at 1.4% — is the lowest it’s been since 1968, and the asking rent for vacant apartments, as measured by Streeteasy’s Rent Index, soared to a record-high $3,730 in July.

Even previous “supply skeptics” now generally agree that a massive increase in housing supply is needed to bend the curve on housing costs in New York City. At a minimum, that means doubling the anemic housing production level — which has averaged 25,000 units annually in recent years — to at least 50,000 units per year.

With so much demand for housing, why hasn’t New York City’s supply kept pace? Part of it is a scarcity of land — there’s nowhere to build but up. But even when there is an available site to build on, New York’s construction costs are higher than in almost any other city. The cost of labor, materials, services and land are all higher here than elsewhere, and onerous regulations further increase the price tag. Higher construction costs generally mean lower profit margins, which constrain the number of projects that developers are willing to build.

High costs restrict growth because developers typically only build housing in neighborhoods where rents are high enough to make at least some profit on new construction. Absent public subsidies, developers must find projects with reasonable costs to make lower-rent apartments worthwhile to build. Lower costs would boost production by making more market-rate and affordable buildings economically viable.

Let’s take a closer look at what inflates each of the three types of costs that developers incur: hard costs (labor and materials), soft costs (financing and professional services like lawyers and architects) and land.

Hard costs

The cost of labor and materials — what real estate professionals call “hard costs” — typically account for around 60% of the cost of constructing a building in the United States.

New York City’s hard costs consistently rank as the most expensive in the world, according to an annual survey by the construction management company Turner & Townsend. After losing the top spot between 2019 and 2022, New York reclaimed its position as the world’s costliest city to build in for each of the past three surveys.

And it’s not just because in New York City, more people want to build vertically. Building the same building costs more in New York than elsewhere, including both high-rise and low-rise buildings.

In the 2024 Turner & Townsend survey, New York had the highest high-rise residential hard construction costs in the world: just above San Francisco, 30% higher than London, 40% higher than Los Angeles and more than double Houston, Toronto, Amsterdam and Paris.

For low-rise town house construction, New York was tied with other costly cities like London, Los Angeles and San Francisco, but 75% to 100% more expensive than Houston, Toronto and continental Europe.

New York is also the costliest city for commercial projects, including offices, hotels and industrial properties.

Why? New York City’s high labor costs are the primary reason. Turner & Townsend found that New York’s labor costs across all types of development, including commercial and residential and union and nonunion projects, are 10% higher than San Francisco’s, at least 40% higher than in Chicago’s or Los Angeles’ and double Houston’s.

Residential development is extremely sensitive to wage costs. Just look at what is happening with the recently approved 485-x property tax incentive. 485-x offers tax breaks to projects that offer a certain share of restricted affordable housing units, but it also imposes wage floor requirements that kick in when 485-x buildings have 100 or more units. Unsurprisingly, developers have responded by building 99-unit buildings to avoid triggering the wage floors, even when they could have built more units.

Residential developers in New York also increasingly use nonunion labor, or a mix of union and nonunion labor, to reduce the cost of building. Union labor is generally more expensive than nonunion labor due to negotiated wages, benefits and work rules. The Regional Plan Association estimated in 2011 that projects that use at least some nonunion labor (often referred to as “open shop” projects) are 20% to 30% less expensive than union-built projects.

Some developers, however, don’t have a choice about wages. Affordable housing programs often require developers to pay workers prevailing wages, which are based on union wage and benefit rates. In New York City, affordable projects with prevailing wage requirements cost 23% more to build, according to the City’s Independent Budget Office.

Productivity also explains some of the cost differences between New York and other cities. Nationally, construction industry productivity — the amount of construction work produced per worker — has declined since the 1970s, but factors unique to New York make construction still less productive here.

Collectively bargained union work rules can raise costs for union projects, typically by increasing the number or skill of workers required to complete tasks. Infamously, overstaffing is a major reason why New York has the world’s highest subway construction costs: The New York Times reported that subway work in New York requires four times as many laborers as underground construction in other cities. This overstaffing affects residential and commercial construction as well. For example, steamfitters are required to work in pairs, and additional workers must be available to monitor site conditions, operate elevators, or repair equipment.

Licensing rules and regulations also affect productivity. For example, New York City’s licensing rules for tower crane operators, which go beyond the requirements in other cities, effectively limit the number of operators who can work in the city. That drives up costs and dissuades the use of tower cranes, even when they would save time or improve safety.

Materials are the other main component of hard costs. It is not that raw construction materials are that much more expensive in New York City; they are, but not nearly to the extent of labor costs. Rather, laws and regulations dictating the use of specific materials and methods drive up the overall hard costs by requiring the use of more expensive materials that take longer or require more skilled labor to install.

Sometimes these requirements are about safety. The building code requires concrete-and-steel construction to mitigate fire risk, largely barring the wood frame construction commonly used elsewhere.

But in other cases, requirements are motivated by factors, such as job preservation, that also drive up costs. For example, the plumbing code requires metal rather than plastic piping, commonly used in other cities, in buildings of six or more stories. Similarly, the electrical code requires specific metal conduits for wiring.

While many of these requirements were enacted in the name of safety, few have been evaluated to see if their benefits outweigh the higher costs — or if the difference in safety exists at all. For example, a study on the safety of single-stair buildings found no difference in fire safety between buildings with one or two means of egress, even though many cities require developers to build two exit stairs.

A final factor unique to New York is the cost of liability and workers’ compensation insurance, which is bundled into construction contracts. Construction insurance is substantially more expensive here than in other states. Part of this is because New York State uniquely assigns strict liability to contractors and building owners for on-the-job injuries involving falls under its Scaffold Law, meaning that if an injury occurs, the contractor is automatically on the hook — no matter what reasonable precautions they had put in place, and even if the injured party was at fault. Every other state uses a comparative liability standard that balances responsibility between owners and workers. The Scaffold Law increases total development costs by at least 7%, according to analysis by the Rockefeller Institute of Government.

Soft costs

Soft costs, which are typically another 20% of a project’s construction budget, include the “behind-the-scenes” work that makes building possible: The architects, engineers, lawyers, consultants, lobbyists, expediters and bankers who shepherd a project from inception to closing to ribbon cutting.

The longer it takes to build a project, and the more complex the planning requirements, the higher the soft costs will be.

The cities with the highest construction costs — New York, San Francisco, Los Angeles and London — also have complex and restrictive building rules. By contrast, the cheapest cities make building fast and easy. Project approvals take 30 days in Houston, compared to 15 months in San Francisco, according to a RAND study. In New York City, it takes an average of 2.5 years to secure zoning changes, which is one reason why most developers choose to build housing on land that is already zoned for development. This is in addition to the months it takes to get a permit for as-of-right work, a process so complex that many contractors hire expediters to navigate the Department of Buildings; it’s often cheaper to pay someone to avoid delays that could wind up costing even more.

Perhaps most significantly, affordable housing projects specifically have complex design requirements imposed by City and State agencies and take years to secure financing and approvals, with firms all charging billable hours along the way. Each step drags out project timelines, and time equals money: The Citizens Budget Commission, where I work, estimated that a two-year discretionary review increases hard and soft costs by as much as $82,000 per unit due to inflation, as input costs creep ever higher, and additional professional services fees.

Lengthy reviews disproportionately increase soft costs on small- to midsize buildings. Because soft costs are more fixed than hard costs, larger projects are better able to take on the risks of development by spreading soft costs over a larger number of units.

Land

The last piece of the puzzle is the price of land. Land costs (the remaining 20% of a total construction budget in most places, but often higher in more desirable or zoning-constrained neighborhoods) are a function of supply and demand.

Some supply constraints can’t change: Even though some people have proposed making Manhattan bigger, the amount of terra firma probably isn’t changing anytime soon.

But other aspects are within government control: Zoning dictates (and often restricts) what and how much you can build; tax policy can make building more (or less) profitable; mass transit or highways make properties accessible to more of the region; and school quality makes homes more or less attractive to families. That is why land costs vary greatly across the city: A condo developer will outbid a rental developer for a prime site near the High Line, but an affordable housing developer might be sole bidder on a parcel in an outer-borough neighborhood. Similarly, land near transit zoned to allow office or residential uses is worth more than land that is inaccessible or zoned exclusively for manufacturing.

That said, the average land cost in New York City remains among the highest in the country. To some degree, that’s a feature, not a bug, of being the country’s densest and most populous metropolis. Barring economic changes, land will always be more expensive here.

But it need not be this expensive. In cities like New York, restrictive land-use policies — like those recently loosened by a trio of City of Yes laws — drive up land costs, creating a vicious cycle: High land costs increase the cost of new development, which reduces development and increases housing scarcity, thereby driving housing and land costs even higher.

What to do about it?

New York will never be a cheap place to build, but the City and State can take specific actions to make New York a little more like Houston and a little less like San Francisco. Government cannot change the price of steel or land-use lawyers, but it can make building more efficient.

Reducing hard costs will require the City and State to improve productivity and modernize building codes. The City could align construction codes and regulations, which are often now bespoke to New York, with best practices from other global cities. Other cities allow the use of less costly materials that require fewer labor hours to install, encourage efficient and innovative technologies like off-site production and modular housing, and boost productivity by making it easier to use tower cranes on job sites. And all without sacrificing safety.

It can also better balance the trade-off between prevailing wage requirements and production. While workers deserve to be paid fair wages, onerous wage requirements can render new residential development financially infeasible or increase the subsidy needed to build. Imposing these requirements on affordable housing in particular can disincentivize more construction of some of the housing we need the most.

The State should repeal New York’s exceptional Scaffold Law and adopt the liability standards used in every other state in the country.

For soft costs, the City and State should focus on predictability and simplicity over site-by-site approval processes and complexity, with speedy permitting, as-of-right approvals and simple financing and design requirements for affordable housing. The State should also reform environmental review laws to exempt beneficial projects.

The easiest way to address the high cost of land is rezoning to increase opportunities for development and chip away at the scarcity that drives up prices. Increasing density allows more sites to be developed, which ultimately reduces the per-unit cost of building housing.

The Adams administration is making it faster and cheaper to build housing in some of these areas, and the New York City Charter Revision Commission has proposed ideas to streamline the lengthy land-use review process to allow more housing to be built.

Yet much more can be done. Take a wrecking ball to higher costs — and watch more housing rise up.