Apartment New Development Demand by State: 2025 Feasibility Rankings, Class-Wise Costs, and Investor IRR Exit Strategies

Apartment Feasibility Study Consultants, Wert-Berater, Inc.

Introduction: Why State-Level Apartment Demand Matters

The Apartment New Development Demand by State analysis has become a vital component for developers and investors in 2025. Rising construction costs, regional migration patterns, and shifting interest rate expectations are reshaping multifamily investment returns nationwide.

While national housing undersupply remains in the millions, local feasibility and IRR depend on three primary levers:

1. Construction Cost per Unit

2. Market Rent Growth Potential

3. Exit Cap Rate and Investor Time Horizon

   
   

States with population in-migration, pro-development regulation, and rent headroom are best positioned for new apartment projects.

Class A, B, and C Apartment Definitions & Investment Profiles

Understanding asset class tiers is key to modeling cost and return accurately.

Class	Description	Typical Rent Range	Investor Profile
Class A	New, luxury, high-amenity, prime urban/suburban	Highest rents	Core & Core-Plus investors
Class B	Mid-market, moderate amenities, built within 10–20 years	Mid-level rents	Value-add developers & yield investors
Class C	Older or basic, low-amenity, workforce housing	Affordable rents	Workforce housing & private capital

Cost per Unit by Class (2025 Construction Benchmarks)

Class	National Avg. Cost/Unit (2025)	Low-Cost States	High-Cost States	Cost Drivers
A	$300,000–$450,000	TX, GA, NC, AZ	CA, NY, HI, WA	Land, high-rise design, labor
B	$200,000–$300,000	TX, FL, TN, IN	OR, MA, CO	Finishes, parking, entitlements
C	$150,000–$200,000	AL, OH, IA, MO	CA, NY	Code upgrades, land availability

Source: ConstructEstimates.com, RSMeans 2025, CBRE Multifamily Cost Index.

Methodology: How We Rank States by Feasibility & IRR

Feasibility scores combine demand strength and cost efficiency, while IRR rankings reflect modelled returns under standardized hold periods.

Ranking Variables:

• Population growth (2020–2025 CAGR)

• Median rent growth (past 3 years)

• Construction cost index (RSMeans multiplier)

• Cap rate spreads (stabilized vs. exit)

• Average equity IRR across 3–10 year holds

• Regulatory friendliness (entitlements, taxes)

Each state receives a Feasibility Score (0–100) combining these metrics.

Top 10 States for New Apartment Development Feasibility

Rank	State	Population Growth	Avg. Rent Growth (3Y)	Feasibility Score (0–100)	Est. Equity IRR (5-Year)
1	Texas	1.6%	12%	93	17–19%
2	Florida	1.5%	15%	91	16–18%
3	North Carolina	1.3%	11%	88	15–17%
4	Georgia	1.2%	10%	86	14–16%
5	Arizona	1.4%	13%	85	14–16%
6	Colorado	1.0%	9%	82	13–15%
7	Tennessee	1.3%	9%	81	13–15%
8	Indiana	0.8%	8%	78	12–14%
9	Utah	1.5%	10%	77	12–14%
10	Idaho	1.4%	10%	76	12–13%

Key Takeaway: Sunbelt and Mountain states continue to dominate due to migration, favorable regulations, and balanced rent-to-income ratios.

State Insights

• Texas: Strong demand in Dallas–Fort Worth, Houston, and Austin. Land availability, favorable tax regime, and high rent growth yield IRRs >18% for 5-year holds.

• Florida: Miami, Orlando, and Tampa show nation-leading rent escalations, though insurance and construction costs erode returns slightly.

• North Carolina & Georgia: Steady in-migration and diversified employment underpin 15–17% IRRs on mid-rise Class B projects.

• Arizona & Colorado: Continued urban expansion, especially Phoenix and Denver corridors, though construction inflation must be managed.

• Tennessee & Indiana: Lower build costs make workforce Class B/C projects attractive; strong 7-year IRRs (14–16%).

• Utah & Idaho: High growth but moderating rents—better for 7- to 10-year holds.

  
  

Mid-Tier States: Moderate Feasibility and Balanced Returns

State Group	Notes
Midwest (OH, MI, MO, KS, WI)	Lower build cost, moderate demand; IRR 10–13% typical.
Northeast (PA, MA, CT)	Strong rent base, high cost, IRR compressed (9–12%).
Pacific NW (OR, WA)	High demand but heavy regulation; Class A feasible only.
Rockies (NV, NM, CO)	Construction cost inflation risk; pick metros with stable job bases.

Bottom 10 States: High Cost, Low Growth, or Regulatory Burden

Rank Range	State Examples	Feasibility Challenges
41–50	CA, NY, HI, AK, NJ, IL, RI, VT, ME, CT	Entitlement delays, high land & labor cost, tight rent caps, or stagnating population growth.

IRR range: 6–10% average on 5-year holds unless ultra-luxury or subsidized.Exit outlook: Core buyers only; slower appreciation cycles.

Equity IRR Analysis for 3, 5, 7, and 10 Year Hold Periods

Hold Period	Typical Strategy	Target Equity IRR (Class B Projects)	Risk Level
3-Year	Merchant build & sell at stabilization	18–22%	High
5-Year	Stabilize + 1–2 years cash flow, then exit	14–17%	Medium
7-Year	Include rent growth + refinance option	12–15%	Moderate
10-Year	Long-term hold for appreciation	10–13%	Lower

Sensitivity: Rent Growth, Cap Rates, and Construction Cost Impacts

+1% rent growth → +150–200 bps IRR improvement+0.25% cap rate at exit → −50–70 bps IRR+10% construction cost → −120–150 bps IRR

Modeling these sensitivities is critical before securing land or construction financing.

Exit Strategies by Investment Horizon

Strategy	Hold Period	Execution Steps	Typical Buyer
Build-to-Sell (Merchant)	3–5 yrs	Develop → Lease-up → Stabilize → Exit	REITs, insurance capital
Refinance & Hold	5–7 yrs	Stabilize → Cash-out refinance → Distribute equity → Continue ops	Private equity funds
Build-to-Core	7–10 yrs	Develop premium asset for institutional exit	Core/core-plus funds
Portfolio Recap	Any	Sell partial stake; recapitalize at higher valuation	Institutional co-GPs

Pro tip: A refi + partial sale hybrid often achieves the best risk-adjusted IRR between years 5–7.

Key Risks and Mitigation Strategies

Risk	Mitigation
Construction inflation	Fixed-price GC contracts, early procurement
Interest rate volatility	Rate caps, forward swaps
Rent softening	Flexible lease terms, micro-amenities
Over-supply risk	Target high-barrier submarkets, not entire metros
Insurance & taxes	Build in 10–15% contingency

Data Snapshot: Average IRR, Cap Rates, and Cost per Unit by Region

Region	Avg. Build Cost (Class B)	Exit Cap Rate (2025)	Avg. 5-yr IRR Band
Sunbelt	$220k	5.25–5.75%	15–17%
Midwest	$190k	6.0–6.5%	12–14%
Mountain West	$240k	5.75–6.0%	13–15%
Northeast	$280k	5.0–5.25%	9–12%
West Coast	$350k+	4.75–5.0%	8–11%

FAQs

Q1: Which states have the highest rent growth outlook through 2026?Florida, Texas, North Carolina, and Arizona lead rent projections, with annual growth between 3.5–5.5%.

Q2: How do equity IRRs compare between Class A and B developments?Class B often delivers 1–2% higher IRR due to lower basis and similar rent growth potential.

Q3: What’s the breakeven hold period for most developers?Typically 5 years — after lease-up and 2–3 years of stable NOI.

Q4: Are suburban or urban infill projects more profitable?Suburban Class B/C assets yield higher IRRs, while urban Class A provides long-term stability and liquidity.

Q5: What is the best exit strategy for a 7-year investor?Refinance in year 5, distribute equity, then sell in year 7 as a stabilized income asset.

Q6: How can small developers compete with institutions?Partner with local landowners, use modular or panelized construction, and focus on underserved secondary metros.

Conclusion: 2025–2030 Investor Outlook

The Apartment New Development Demand by State landscape remains favorable where population and jobs grow faster than new supply. Sunbelt, Mountain, and selective Midwest metros dominate for feasibility and IRR potential.

Short-term investors (3–5 yrs) should focus on merchant build-to-sell in Texas, Florida, and Georgia.Longer-term investors (7–10 yrs) benefit from holding in North Carolina, Tennessee, or Colorado, capturing sustained rent appreciation.

Exit smart, build lean, and model early—that’s the 2025 blueprint for superior multifamily returns.

External Resource

• CBRE U.S. Multifamily Development Report 2025

• RSMeans Construction Cost Index 2025

• ConstructEstimates.com – Apartment Construction Cost Calculator

Donald Safranek, President, Wert-Berater, Inc. Feasibility Study Consultants

Wert-Berater Feasibility Studies, LLC

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Suite 2382

Laguna Beach CA 92651

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