This palace was built in 1905, during the early reign of Sultan Alauddin Sulaiman Shah, the fifth Sultan of Selangor. Istana Bandar has 15 rooms. It is made of wood and marble. Sultan Alauddin himself, who also bore the cost of constructing the palace, made the entire design.

Sultan Alauddin resided at this palace for 35 years until his death in 1938. It was at this palace too, that the present and seventh Sultan of Selangor, Sultan Salahuddin Abdul Aziz Shah, was born in 1926.