Small-Scale Development in New York's High-Cost Environment

Written by:

Steve Marcinuk

Date:

02 Feb 2026

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The multifamily development landscape in the New York metropolitan area presents significant challenges for small-scale developers, from complex regulations to rising construction costs. Yet some developers are finding ways to keep projects viable in what is now the world’s most expensive construction market.

James Smithmeyer, founder of JMJ Contracting and Development LLC, has built a business around 20- to 30-unit projects in Westchester County and the broader New York metro area. His experience illustrates how smaller developers can adapt and compete, even as market conditions increasingly favor large institutional players.

From Engineering to Development

Smithmeyer’s engineering background led him to focus on the environmental, social, and financial impacts of real estate. He began his career at AvalonBay Communities as a construction superintendent and later moved through roles in construction management and real estate finance before launching his own firm.

Working at AvalonBay gave Smithmeyer firsthand insight into how major institutional developers operate in the Northeast. He credits this experience with shaping his approach as he shifted to developing his own projects, starting with a single building in New York City and expanding into surrounding markets.

Local Knowledge as a Competitive Edge

For Smithmeyer, deep local knowledge is essential to small-scale development. At a project site in Pelham, New York, he emphasizes the value of community relationships and firsthand familiarity with local stakeholders. He knows the people involved with a neighboring nonprofit theater, the residents across the street, and the nearby property owners.

This hyperlocal approach goes beyond simple networking. Smithmeyer notes that adjacent communities in Westchester — such as Mount Vernon, New Rochelle, Bronxville, Larchmont, and the Bronx — are all unique markets, each with its own pricing dynamics, tenant demand, and regulatory nuances. Understanding these differences enables him to identify opportunities and avoid pitfalls that developers less familiar with the area might miss.

Project Economics in a High-Cost Market

Despite the high construction costs, Smithmeyer says his projects remain economically viable due to rising rents. His recent development at 1395 Fifth Avenue in Pelham, completed in late 2023, is a clear example. Construction costs increased by more than 10% compared to the 2020 budget, and rents have also risen. Rent growth more than compensated for increased expenses, allowing the project to outperform initial projections.

Smithmeyer attributes some cost control to early purchasing decisions. By securing certain materials before the post-pandemic surge in prices, he avoided the worst of the inflation. He acknowledges that projects started just a year later would have incurred construction costs 20-25% higher.

This combination of rent growth and strategic timing has encouraged him to pursue new developments in the same area, adjusting unit counts as needed to align with current market conditions and available sites.

Regulatory and Insurance Pressures

New York’s regulatory environment imposes additional costs and risks on developers, particularly with respect to insurance. Smithmeyer highlights the impact of the state’s scaffold law, which imposes strict liability on property owners for gravity-related injuries. This requirement forces developers to pay significantly higher insurance premiums, typically two to three percent of construction costs, compared to around half a percent in other states.

Beyond insurance, complex permitting and code requirements can slow projects down, especially near completion. Delays late in the process are exceptionally costly, as developers have already spent most of their funds, are accruing interest, and may have tenants waiting to move in. Smithmeyer notes that regulatory delays can erode project returns more than direct fee increases.

Technology Integration and AI Applications

JMJ has begun using artificial intelligence tools to improve efficiency and inform project decisions, though Smithmeyer is realistic about current capabilities. He finds AI most helpful for aggregating information and generating ideas, rather than for making final decisions.

For example, the firm recently used AI to produce preliminary architectural renderings by combining images of a neighboring project and a historic theater. While the AI-generated pictures were not suitable for formal submissions, they were helpful in community discussions, helping stakeholders visualize potential designs early in the process.

The addition of Elisha Heaps, who has a background in data science, signals the company’s commitment to leveraging new technologies to improve decision-making as these tools evolve.

Construction Challenges and Trade Issues

Smithmeyer points to prefabricated components and licensed trades as areas of risk for small-scale developers. Items such as custom windows or countertops often require large upfront deposits, and if a vendor fails to deliver, replacement is costly and time-consuming.

Licensed trades such as plumbing and electrical work also pose challenges. If a contractor underperforms, replacing them is complicated by permit requirements and the need to review completed work. This can lead to project delays and additional expenses, issues that have a greater impact on small projects with tight margins.

Market Outlook and Risk Assessment

Looking ahead, Smithmeyer is cautiously optimistic about small-scale development in high-cost markets such as New York. He is most concerned about new regulations that may disproportionately affect smaller projects. For example, a regulatory requirement that adds $75,000 in costs is more manageable for a 100-unit building than for a 20-unit project, where it can significantly impact profitability.

Time delays from regulatory changes are even more problematic for small developers, who lack the resources to absorb long approval processes, mainly when delays occur late in construction.

Despite these risks, Smithmeyer believes small-scale projects remain viable in the New York metro area. He points out that higher rents in the region support professional management and can justify the added complexity of building in such a costly environment.

Financing and Capital Structure

Smithmeyer says construction loan terms for his projects have stayed consistent since 2021, with loan-to-cost ratios around 67%. However, he cautions that his limited number of projects prevents him from drawing broad conclusions about the market overall.

JMJ’s capital typically comes from friends-and-family syndications rather than institutional investors, though Smithmeyer is open to working with family offices or private equity in the future. This approach allows him to maintain flexibility and control, but also limits the number and scale of projects he can pursue at any given time.

Strategic Positioning

JMJ’s strategy reflects a broader approach among small-scale developers: leveraging local knowledge and relationships to offset the disadvantages of smaller size. By focusing on markets they know well and keeping operations lean, small developers can find opportunities that larger firms may overlook or pass up due to scale.

The company’s measured use of new technology, combined with a focus on execution fundamentals, offers a model for small developers looking to adopt innovation without overreliance on unproven tools.

As construction costs and regulatory pressures continue to rise, Smithmeyer’s experience shows that careful market selection, local expertise, and strategic timing are essential to keeping projects viable in expensive markets.

Implications for Investors

For investors considering small-scale multifamily development in high-cost areas, JMJ’s experience underscores both the challenges and the opportunities. Developers who understand their local markets, manage costs proactively, and maintain realistic expectations about returns can still find success—even as larger players dominate the headlines. The key is a disciplined approach that balances innovation with deep market knowledge and a willingness to adapt as conditions evolve.