“High End” Apartment Construction Creates Mismatch of Supply and Demand
wolfstreet.com
wolfstreet.com
Currently, I live in a luxury apartment about 4 blocks away. A 2013 building, it has AC and gigabit internet, and free wifi on the roof deck
The housing problem is that - while the difference in utility between these units is huge, the rental price difference is just a few hundred per month. Granted that they are the same square footage. "The indigent" cannot afford base-level housing.
Look at it this way, say a small apartment has 12 Square feet of counter space in the kitchen laminate counters cost $25 per square foot and granite costs $50. the relative cost difference between luxury and cheapo now is almost nothing once amortized and compared to the total rent.
Not a rental unit, but the gap between a crappy house (unmaintained 1950s with a staircase in the bathroom) and an ultra modern home with a pool next door was only 20% or so. I view this as a sign that the market is way off its mark.
In the past, I've heard that a house's value can maximize at 140% of the value of its neighbors, so a 1950s house in the same neighborhood as the modern house might drag down the modern house's value.
Wow how does that happen?
The housing with low utility is in Bumfuck, IL where there haven't been any jobs for 40 years.
In London it has long been a joke that all new builds are branded "luxury apartments" as a matter of course, even if they are really low specification, i.e. the term "luxury" has become both obligatory and in the process meaningless.
I imagine that a lot of the dilution has come from (re)developers labeling units as luxury and doing the bare minimum to qualify, specifically to avoid rent control.
No safeguards like those in Phoenix, it's still the wild, wild west of politics & regs here.
Go take a tour of some of these and look at everything with a critical eye. You’ll notice that workmanship is usually very poor, fixtures are of cheap Chinese quality, faux materials everywhere.
I think the industry just learned how to make high-end-looking very well.
In reality many of these luxury buildings have quality problems to come years after delivery. And good luck getting the builder to fix it. They conveniently “go out of business” or just drag on forever with promises and even court battles.
They build the structure of these buildings very solid, but the fixtures purposefully cheap. Once styles change they can gut renovate them for very cheap and maintain their stylish image (and rents). I think a very well made but out of style apartment would be more expensive to make and lose rents more rapidly.
What's wrong with timeless instead of trendy?! (Rhetorical question)
Also, my wife is very sensitive to mold & mildew, so brand new construction is easiest on her.
It's a perverse incentive: they make it nicer to avoid regulations, not to actually attract luxury-minded tenants.
And yet occupancy rates are at around 50%, a good portion of the ones that are taken up are from foreign investors paying all cash, and like someone else mentioned, the workmanship is mediocre at best (I saw one go up literally right next to my house from the studs).
I just can't see why it's either luxury or low-income housing. The margins can't be that good if you have huge occupancy rates, and it's certainly subsidized if you're building for low-income housing...isn't there a better way in the middle?
Well... good? Seems like the system is working. More supply = lower prices across the board, even if the supply is not exactly what was "needed".
If developers build expensive housing beyond demand they can't fill as intended, driving prices down, why should this not be better than nothing? Even if it's less lucrative for them than expected, it should be net positive for renters...
Well said. Developers build high end because margins are high and vacancies are low and regulation won't allow enough competition to actually threaten their position in the market. In any scenario where you're limited by how much you can build, you're going to build your highest margin prospects first.
Developers can build high end all they want, but they have to lease them up or they can't pay off their loans or sell their property. Let them build more and when the luxury market saturates, more affordable buildings will start to look like the best prospect for development.
Unfortunately the fact that developers build luxury buildings is reason enough for some people to not let them build at all.
Companies will always chase the higher margin luxury market first before hitting the mid range and budget audience.
When leverage is involved there is a lag. (If your building requires X per square foot to pay the debt, you may hold out longer for someone who will pay X versus renting for 0.9X.) But that is temporary.
The luxury housing boom is doing that to New York. I just negotiated my rent down by comparing the recently-discounted rent at the luxury building down the street to ours, counting up the amenities, and making my case for moving to the landlord. Not wanting to lose a good tenant in November, they acceded.
>Discretionary
>Renters by choice. Attracted to the extreme upper end of the apartment market; properties generally of resort quality, clearly appealing to households capable of owning a residence, but choosing to rent, or households with substantial incomes, but without wealth. The luxury rental category primarily focuses on empty nester households, or more particularly, high net worth households. The renter-by-choice household is demanding; finishing detail and amenities included in properties appealing to this category must be of exceptional quality.
>A+ / A
>High Mid-Range
>"Lifestyle renters." The high mid-range category appeals to double-income-no-kids ("DINK") households holding income status similar to that typically required of discretionary property positioning, but not in possession of the wealth more probably associated with the renter-by-choice rental household category. Properties holding high mid-range status typically offer excellent finishing quality, and attractive common area facilities, and typically focus on an environment providing a more social experience.
>A- / B+
>Low Mid-Range
>Working professionals. The low mid-range household is typically composed of working professional, “gray collar” households (i.e. policemen, firemen, teachers, technical workers). These households, while renters-of-necessity, are inclined to apply some discretion regarding rental environment quality, and will opt for “adequate” quality of improvements offering reasonably attractive amenities in a good/convenient location.
https://www.yardimatrix.com/About-Us/Our-Methods/How-We-Defi...
They count anything in the high mid-range or above as "luxury" when clearly it's not. Anything below Low Mid-Range has "older" as part of it's description, so obviously no new construction will be placed there.
In my market the new apartment complexes are almost exclusively 2 bedrooms or less. They are very clearly for those with disposable income and no kids. Those that don't fit into that category move a little bit out and rent townhomes/single family homes.
But the reasons (from the constructor/realtor viewpoint) are easy to understand, once the "basic" building costs are considered (and they are not-so-different between a "poor" home and a "luxury" one) the rest is "accessories", and there is a larger margin on these than on the "basic" construction, in the sense that the increase in the selling price as a "luxury" home is much larger than the added cost for these accessories, and this without considering the "fake only luxury" cheap ones sometimes used.
«Clearly, there is a trend among some high-income and high-wealth people to avoid the suburbs and go instead for convenience, views, short commutes to work, etc. »
Back in my hometown in India, where average 3 bedroom rental properties go for under $300/month, builders are making luxurious homes that cost $300,000+
They've been on the market for nearly 4-5 years. No one is biting because no one has that kind of cash. Yet, the market doesn't seem to relent
Local governments have a interest to not crack down on this in the form of taxes and fees associated with their real estate laws.
Where I live (downtown Phoenix) every single vacant lot and quite a few "marginal" businesses the developers could get their hands on have been turned into massive luxury condo/apartment complexes. So much so the city is telling my landlord he isn't charging "market rates" and needs to increase the rent, and taxes he pays, due to all the high-rent places that went up in the last couple years -- luckily he doesn't agree so...