Check out all the cranes in our nation’s largest cities. And what are those cranes building? Apartment buildings…luxury apartment buildings.
Multifamily construction is at a 40 year high. In 2017, apartment complexes in our 150 largest cities jumped to a sky rocketing 395,775 units, a full +46% more than the number of units completed in 2016. This nearly doubles the long-term average of multifamily units in the country, according to RealPage, an apartment management software and data company.
Between 75-80% of these newly completed 395,775 apartment complexes are upscale, luxury buildings. Why? Industry experts point to two reasons, the first being demand by choice. Some consumers in the market for luxury apartment units are and have been considering downsizing from luxury single-family residents. Others within this price point are owners of two, perhaps three, high-end single-family homes that they have rented. In both cases, these consumers don’t struggle to afford high monthly rental payments and they need a comparable yet smaller place to live.
The second reason developers and builders opt for luxury, multi-family construction projects is high construction costs. Toby Bozzuto, president and CEO of the Bozzuto Group, pretty much sums it up. “A 2 by 4 doesn’t care whether it’s in a luxury building or in an affordable building. The only difference, of course, a difference that matters to the developer, is the rent and there’s a huge disparity in high-end rent vs. low-end rents. The rents have to be high to support the costs.”
The cost of that 2 by 4 is at an all time high. Materials such as steel and concrete are expensive. Land prices, assuming there is any land available for construction, have spiked everywhere in the country. And, to top it off, construction labor costs are at an all-time high while labor supply is at an all-time low.
With some 70,000 units in his company’s multifamily management and development portfolio in the Northeast and Mid-Atlantic regions of the country, Bozzuto sees the world of apartment rentals as a “tale of two cities.”
“Incomes of luxury renters aren’t affected by how much they pay in rent. Mid and lower income renters are…so much so that I believe there’s an acute crisis heading our way.”
Latest research by Harvard University’s Joint Center for Housing Studies backs up Bozzuto’s premonitions. Data indicates that nearly 47% of all renter households, 21M, pay more than 30% of their income on housing. Some of those 21M people, nearly 40% of them, pay +50% of their income on housing.
According to Christopher Herbert, managing director of the Joint Center for Housing, “…these are alarming trends that suggest a growing inability (of the construction industry) to supply housing that is affordable for middle and working class renters. The situation is dire for those with very low incomes.”