Could Glut of Luxury Rentals Cause ‘Crisis’?

February 20, 2018

The luxury apartment market has been overbuilt, while a shortage of affordable rental housing is worsening, economists warn.

Apartment completions soared to 395,775 units in 2017 in an analysis of the 150 largest U.S. cities by RealPage, an apartment data firm. That is up by 46 percent over 2016 production numbers and double the long-term average. Luxury buildings comprised between 75 percent and 80 percent of the new supply.

“It’s really tough to deliver product at those lower price points,” Greg Willett, chief economist at RealPage, told CNBC. “The cost of land, the cost of building materials, the cost of labor. It’s really about the same regardless of what product you’re doing, and it’s just tough to make a deal work financially if you’re going toward that middle-market price.”

In middle- and lower-income markets, renters are spending proportionately more on their rent—“so much so I believe there’s an acute crisis headed our way,” says Toby Bozzuto, president and CEO of The Bozzuto Group, a multifamily management and development company.

Nearly half—or 47 percent—of all renter households are paying more than 30 percent of their incomes on housing, according to a 2017 report by Harvard’s Joint Center for Housing Studies. About 11 million households are paying more than 50 percent of their income on housing, the report showed.

“While the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle- and working-class renters, let alone those with very low incomes,” Christopher Herbert, Harvard’s Joint Center for Housing Studies’ managing director, told CNBC.

In the luxury market, some landlords are starting to offer concessions to try to lure more renters, like with offers such as a month’s free rent.

“We’re getting a pretty competitive leasing environment in select locations at those really high-end price points, and we’ve already gotten flat to slightly declining rents,” Willett says.

On the other hand, apartments outside of the luxury market are still seeing rent increases due to a low supply of units for lower price brackets. Builders say they struggle to build at the lower end.

“The two-by-four doesn’t care whether it’s in a luxury building or in an affordable building. It costs the same,” Bozzuto says. “The differential of course, is the rent and there’s a huge disparity in high-end rent versus low-end rent. So the issue is for us to develop an economically viable, feasible project, it has to be, by its very nature, high end. The rents have to be high to support the cost.”

Source: “Major Apartment Developer: ‘There Is an Acute Crisis Headed Our Way,’” CNBC (Feb. 16, 2018)