Single‑Stair Buildings: California’s Code Fight and the National Construction Capital Reallocation

Hook: Why a single stairwell in California matters to your allocations

Investors and developers are watching a single code decision in California the way traders watch a Fed announcement. For finance teams, REIT portfolio managers and construction lenders, whether California permits single‑stair multifamily buildings above three stories will change development costs, risk profiles and the regional destination of institutional capital. If you deploy capital into multifamily projects, this is not an architectural detail — it is a capital‑allocation signal that will affect returns, underwriting, and geographic strategy across the U.S. in 2026 and beyond.

Executive summary — the takeaway for investors and capital allocators

• Permissive outcome: Lower hard‑costs per unit, faster permitting cycles and higher developer IRRs, making denser infill projects more attractive to institutional investors and REITs; expected to reroute some capital back into high‑cost coastal markets.
• Restrictive outcome: Continued cost inflation for mid‑rise stock, pushing capital toward Sunbelt greenfield and adaptive‑reuse opportunities, and increasing pressure on specialized affordable‑housing funds.
• Net effect on capital flows: The code choice functions as a lever — marginal changes in unit economics (5–12% construction cost variance in industry models) drive outsized reallocation across markets when yields are thin and cap rates are tight.

Context: The California fight and the national backdrop (2025–2026)

In late 2025 and early 2026 California's State Fire Marshal finalized a high‑profile review of single‑stair construction, deciding whether to allow a single continuous egress stair for residential buildings above three stories under controlled conditions. The debate is part regulatory, part political and wholly economic: California’s housing shortage, high construction costs and aggressive climate/energy rules have squeezed developer returns.

Other states and cities already adopted permissive rules. New York City and Seattle have allowed single‑stair mid‑rise construction since 2012; several states — including Colorado, Montana, Texas and Tennessee — enacted permissive code amendments in the early 2020s. In 2024–25, industry studies and municipal pilots suggested that, combined with modern fire‑safety features and sprinkler systems, single‑stair designs can meet life‑safety objectives while lowering costs.

Why this matters now (2026)

Three recent trends make the timing critical for investors:

1. Construction cost inflation began to stabilize in late 2025 after multi‑year pressure; a marginal reduction in hard costs has outsized impact on returns when debt costs and cap rates are elevated.
2. Institutional capital allocation is moving from yield‑chasing to selectivity: managers prioritize risk‑adjusted returns, permitting certainty and regulatory headwinds.
3. Policy shifts at the state level are producing patchwork rules, creating arbitrage opportunities for capital and risk that move faster than zoning changes.

How single‑stair rules change the math: construction costs and schedules

At the project level, the stair configuration affects design, structural demands and gross floor area. A second stairwell consumes rentable square footage and often forces thicker structural elements or a wider building footprint — both of which raise hard and soft costs.

Key cost components affected

• Hard costs: Additional stair shafts, fire partitions, and structural bracing add material and labor. Developers and contractors report industry estimates that allowing single‑stair mid‑rise designs can reduce hard costs by roughly 5–12% compared with two‑stair equivalents, depending on site and configuration.
• Soft costs: Design and permitting complexity often declines for simpler egress schemes, shortening architectural and engineering cycles by weeks in permissive jurisdictions.
• Net rentable area: Removing a second stair can add usable square footage equivalent to 1–3% of gross floor area — a small percent that translates into material revenue uplift across 100+ units.
• Schedule: Simpler structural layouts and fewer partition changes often reduce construction schedule risk; time‑to‑lease can shorten materially, improving early cash flows.

Practical example — pro‑forma sensitivity (illustrative)

Take a hypothetical 100‑unit mid‑rise in a high‑cost coastal market:

• Baseline two‑stair hard cost: $40,000 per unit (hard costs only)
• Single‑stair scenario hard cost reduction: 8% (~$3,200 per unit)
• Added rentable area revenue (annual): 1.5% of gross area → net additional rent of $100–$150/unit/month depending on market.

Combining cost savings and incremental rent can improve stabilized yields and boost developer IRR by several hundred basis points — a margin that determines whether projects clear hurdles when capital costs are high.

Developer returns and underwriting implications

Developers underwrite projects with sensitive assumptions for hard costs, rent growth, and exit cap rates. When yields compress, even modest construction savings can mean the difference between moving forward or sitting on the land. In 2026, with cap rates higher than 2020–21 but lower than during early‑cycle stress in 2023, single‑stair permissiveness becomes a lever to restore feasibility.

How underwriters update models

• Loan‑to‑cost (LTC) and loan‑to‑value (LTV): Reduced costs directly lower LTC and improve LTV at stabilization, enabling higher leverage or smaller equity checks.
• Return thresholds: Private developers and institutional sponsors often require a minimum leveraged IRR (e.g., 12–16%). Single‑stair savings can bridge the gap when pro formas are marginal.
• Equity pricing: For sponsors raising institutional equity, a clearer pathway to target returns reduces the equity risk premium demanded by investors and can lower sponsor dilution.

Risk adjustments lenders and investors must consider

• Insurance premiums and policy exclusions where codes differ (see next section).
• Potential for subsequent retrofit requirements if a jurisdiction reverses course or tightens conditions.
• Operational contingency for egress maintenance, emergency planning, and tenant education.

Safety, insurance and regulatory risk

Opponents of single‑stair designs emphasize life‑safety and emergency response. Proponents counter that modern automatic sprinkler systems, smoke control, pressurized stairwells and robust fire engineering can mitigate the additional risk.

Insurance market reaction and cost of risk

Insurers price risk based on underwriting history and loss exposure. For projects in jurisdictions that permit single‑stair construction with stringent performance requirements, underwriters in 2026 are increasingly willing to issue coverage, but often with conditions:

• Higher deductibles or premiums for buildings that do not meet specific engineered performance standards.
• Requirements for active monitoring systems (e.g., real‑time sprinkler diagnostics) and documented maintenance plans.
• Potential restrictions on certain occupancies or limits on tenant density in specific building types.

Policy design matters: a phased, performance‑based approach

Where jurisdictions have implemented phased approvals and mandatory performance testing, the risk transfer to insurers and lenders is more straightforward. The best‑practice approach for policymakers is to pair permissive egress rules with measurable engineering standards, inspection regimes, and data collection — a model that reduces ambiguity for capital markets.

Where institutional capital will flow: regional winners and losers

Capital follows three ingredients: yield, risk, and permitting certainty. Single‑stair permissiveness shifts those inputs in ways that change comparative advantage across markets.

Markets that gain if codes become permissive

• High‑cost coastal metros with supply constraints (e.g., parts of California): Permissive rules lower per‑unit costs and improve returns on infill development, encouraging REITs and institutional developers to re‑enter projects previously considered infeasible.
• Transit‑oriented infill markets: Where land is scarce and BTR (build‑to‑rent) or affordable projects require tight unit economics, small cost reductions move the needle.
• Mid‑sized cities with stable demand: Markets with predictable tenancy and strong rent growth can absorb additional supply without destabilizing returns.

Markets that gain if codes remain restrictive

• Sunbelt and greenfield suburbs: Where land is cheaper and two‑stair designs are already standard, capital may continue to flow to low‑cost construction markets.
• Adaptive‑reuse and conversion plays: Investors may pivot to converting office or hotel stock where building code workarounds are more straightforward than new constrained infill.

REITs, private equity and pension funds — how allocation shifts

REITs with urban multifamily exposure will update geographic weighting and acquisition pipelines under either scenario:

• Permissive rules broaden acquisition funnels for REITs focused on core coastal stock and increase competition for infill deals, potentially compressing cap rates.
• Restrictive rules concentrate acquisitions in lower‑cost metros, where institutional capital can buy yield at cheaper basis.
• Private funds and opportunistic managers will exploit regulatory pockets — buying land options in jurisdictions trending toward permissiveness and selling into demand cycles.

Practical playbook: What developers, lenders and investors should do now

For developers

• Run dual pro formas: Model projects under both single‑stair and two‑stair scenarios. Stress test IRR across construction cost, rent per unit, and cap rate shifts.
• Design flexibility: Prioritize floorplates and structural systems that can accommodate either layout with minimal retrofit cost. Modular stair cores and prefabricated egress elements reduce switching costs.
• Community and code engagement: Proactively engage fire marshals and municipal planners to demonstrate engineered safety outcomes and secure conditional approvals that reduce political reversal risk.

For lenders

• Update covenant templates: Incorporate code‑change contingencies and require proof of performance systems for buildings that benefit from permissive rules.
• Stress testing: Underwrite to conservative LTC/LTV in jurisdictions with uncertain code trajectories; price-in higher insurance loads where underwriters are less comfortable.
• Portfolio diversification: Avoid concentration in markets where a single regulatory reversal could materially impair collateral value.

For institutional investors and REITs

• Geographic optioning: Hold small, low‑cost option positions (land or JV rights) in jurisdictions expected to liberalize codes in 12–24 months.
• Capital allocation agility: Maintain a pipeline that favors markets with permitting clarity and documented performance standards tied to single‑stair allowances.
• ESG & governance: Demand disclosure on fire‑safety features and maintenance regimes from portfolio managers; governance risks around occupant safety affect reputational capital.

Policy recommendations that balance supply and safety

From a public‑policy standpoint, the optimal approach is pragmatic and data‑driven. A few best practices for jurisdictions considering single‑stair permissiveness:

• Performance‑based standards: Allow single‑stair only when buildings meet quantifiable smoke control, sprinkler reliability and stair pressurization targets.
• Pilot programs: Implement time‑limited pilots with mandatory post‑occupancy data collection to assess real‑world outcomes.
• Clear insurer engagement: Coordinate with the insurance industry to ensure underwriters have the data needed to price risk accurately.

“Permissive codes without performance monitoring simply shift risk to occupants and insurers. The right balance is permissive design paired with robust engineering and verification,” — an industry fire engineer advising several West Coast municipalities.

Case studies and signals from 2025 pilots

Several municipal pilots completed in 2024–25 show consistent signals: when single‑stair mid‑rise designs were accompanied by modern sprinklers, full‑building smoke control and monitored safety systems, emergency services reported no material increase in adverse outcomes compared with traditional two‑stair designs. Those pilots also recorded faster permitting and modest cost savings for developers — evidence that institutional capital interprets as lower execution risk when data is transparent.

What to watch in 2026

• California Fire Marshal decision: The state's ruling and any conditional language will be the immediate catalyst for capital rebalancing.
• Insurance pricing moves: Expect premium adjustments and new endorsements for single‑stair buildings as underwriters update models.
• Municipal code updates: Other states may accelerate code changes, creating a secondary wave of investment opportunities and competitive pressures.
• REIT portfolio disclosures: Watch S‑forms and investor presentations for changes in pipeline geographies and risk narratives.

Actionable checklist — immediate steps for each participant

Developers

• Create dual pro formas and present both to capital partners.
• Secure conditional approvals and pilot program inclusion.
• Invest in modular stair solutions to maintain flexibility.

Lenders

• Incorporate code‑change scenarios into stress tests.
• Require performance monitoring and maintenance plans on single‑stair deals.

Institutional investors & REITs

• Reweight pipelines toward jurisdictions with clear performance standards.
• Negotiate acquisition terms that reflect contingent code risk.

Final assessment — why small code changes produce large capital moves

Single‑stair policy is a classic example of a marginal policy change with disproportionate economic consequences. When pro formas are marginal and capital is selective, a small improvement in unit economics — even 5–8% in hard‑cost savings or a 1–3% increase in net rentable area — meaningfully alters developer returns and institutional allocation decisions. In 2026, with markets still digesting prior rate cycles and construction inflation stabilizing, the decision in California will reverberate nationwide: permissive rules pull capital into constrained urban markets; restrictive rules redirect it to lower‑cost regions and alternative strategies.

Call to action

For investors, lenders and developers who need forward‑looking modeling templates, regional risk matrices, and policy trackers tied to code changes, we maintain a rolling database and pro‑forma models updated weekly as the California decision and municipal code amendments evolve. Subscribe to our Regional Economic Reports for the latest deal flow intelligence and download our dual‑scenario underwriting template to stress test your portfolio today.

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