“High End” Apartment Construction Totally Dominates, Creates Mismatch of Supply & Demand

Because that’s where the money is, on paper. But it’s not where the market is.

There are plenty of brand-new apartments to choose from, thanks to a multifamily construction boom in major cities. These apartments are in good locations. They’re nice and have everything you’d want. But for many people, rents are just too damn high. Here’s why:

In the first half of this year, 87% of the completed apartment projects with 50 or more apartments in 130 major cities in the US are considered “high end,” according to a report by RentCafé, based on Yardi Matrix data on 80,000 large-scale apartment developments. This is up from 52% of properties completed in 2012:

“High end” here means “luxurious” – a marketing position for a building. In expensive cities, projects that are not luxurious are nevertheless expensive – such as San Francisco. You have to pay a lot in rent but you might not get a lot for it. An expensive dump in San Francisco is not “high end.” It’s just expensive. In other cities, for the same amount, you can rent a luxury apartment. But that kind of “high end” in San Francisco requires princely sums of money.

This is based on Yardi Matrix’s definition and classification of the apartment market of multi-family properties of 50+ units, where “high-end” or “luxury” rental properties make up the top two categories:

“A+” and “A” buildings: 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-” and “B+” Buildings: 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.

These two categories are considered “high end.” A step down and no longer “high end” is B and B-, which is for “working professionals,” such as policemen, firemen, teachers, and technical workers. Then it goes down the scale all the way to “D.” Subsidized housing is in a separate category.

These “high end” apartments are marketed to high-income people. Alas, there are not that many high-income people around. Nevertheless, in many cities, 100% of new apartment properties being complete in 2018 are “high end.”

The percentage of high-end projects has soared in cities that are not among the most expensive rental markets in the US and have hit 100% in cities such as Oklahoma City, OK, Dallas-Fort Worth, TX, Kansas City, MO, Charlotte, NC, and Philadelphia, PA.

On the other hand, in ultra-expensive markets such as San Francisco, Los Angeles, and Seattle, there are still projects being built that (while expensive) are not in the “high-end” category.

The list below shows the 30 largest US cities (not metros) and their high-end properties as a percent of all properties with 50+ units completed in the first half of 2018. Of these 30 cities, 16 exclusively built “high-end” properties in the first half, up from 7 cities in 2017. Texas has four cities on this list where new high-end developments accounted for 100% of all large-scale apartment completions:

City 2018
Dallas, TX 100%
Forth Worth, TX 100%
Boston, MA 100%
Houston, TX 100%
Jacksonville, FL 100%
Charlotte, NC 100%
Indianapolis, IN 100%
Columbus, OH 100%
San Jose, CA 100%
Memphis, TN 100%
Oklahoma City, OK 100%
Los Angeles, CA 100%
Chicago, IL 100%
Detroit, MI 100%
San Francisco, CA 100%
El Paso, TX 100%
Nashville, TN 92%
Washington, DC 91%
Baltimore, MD 88%
Austin, TX 88%
San Antonia, TX 86%
Philadelphia, PA 86%
New York, NY 85%
Denver, CO 83%
San Diego, CA 83%
Las Vegas 80%
Louisville, KY 80%
Portland, OR 80%
Phoenix,  AZ 78%
Seattle, WA 72%

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. This dynamic is spread over apartments and condos. Urban living has become cool. And these dynamics look good when the project is pitched to investors – and that’s where the money is.

But the market for high-end apartments is limited. Not that many people make enough money to be able to afford them. Flooding the market exclusively with these apartments, and not building apartments suitable for median incomes, the industry creates a mismatch of supply and demand that has been cropping up in major markets. And given the “high-end” projects underway, this mismatch will grow.

The solution is the market. These units will have to be rented out, either by the developer or by the creditors that will end up with the project if it fails. The way to fill these units is to cut rents until sufficient demand materializes. And this puts pressure on rents in lesser buildings that have to compete with these high-end units. In other words, it creates downward pressure on rents, from the top down.

It’s a lot of debt too: Multifamily mortgage debt outstanding rose to $1.3 trillion in Q2. Of this debt, 49% has been securitized, and many of those MBS have been guaranteed by Fannie Mae and Freddie Mac. Banks and thrifts own 32% of the multifamily mortgages. State and local governments, insurance companies, and other entities own the rest.

With most of the new funding going into high-end projects, creditors clearly are being charmed when these projects get pitched. On paper, one by one, they make a lot of sense. But the market might not play along.

And here are the rents, and how they’ve risen or fallen, by city, down to the neighborhood. Read… The Rental Markets in America, from Hot to Cold  
 

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  73 comments for ““High End” Apartment Construction Totally Dominates, Creates Mismatch of Supply & Demand

  1. Prairies
    Oct 3, 2018 at 12:55 pm

    Sounds like the sharpening of a double edged sword. High volume and low demand at the top to bring down high end prices – buckling the speculators on one side. Likely leaving less growth in affordable rental units and causing prices to go up at the lower end of the scale if the renters have left the high end market to more affordable choices – buckling middle class renters spending more than 50% of their income on housing already.

    • joe
      Oct 4, 2018 at 7:35 am

      Time to anticipate how the govt will bail them all out in order to find a profitable play.

    • rhodium
      Oct 4, 2018 at 12:07 pm

      I’ve noticed it’s creating a compression in rents. Here in the Denver area a cheap one bedroom apartment in a very old run down complex in a higher crime neighborhood might cost you $1100, go just a little farther out to nicer area and find a much nicer mid level apartment and it’ll only cost a couple hundred more. Do that again and for $150 more you can have a luxury apartment. The difference between living in squalor and luxury might only be $350 a month and a few miles. It’s kind of ridiculous and yet I see little evidence of vacancy in any of them. A lot of people are strained to afford the low end while the high end is heavily competing against itself. If you make a little above average here you’re doing alright suddenly, but dip just a little lower on pay and affordability rapidly drops. Occasionally going through job postings for the area indicate to me that a lot of the base pay for professional jobs puts people right around the knee for affordability (~$50k/yr), a couple pay raises later and it gets a lot easier, but for anyone in less professional roles (sub $20/hr) they will struggle to even afford bottom barrel without roommates.

  2. Nat
    Oct 3, 2018 at 12:57 pm

    Almost all the residential REITS I can find are in the upper end – which is why I have been avoiding them like the plague. Yet at the same time I am seeing almost no articles in the financial press about the likely unwell not-too-distant future of these numerous upper end residential REITS given the current softening demand. All the related articles I can find are either still touting these REITS or declaring them better or worse only relative to one another (sort of implying their isn’t a risk in the writers mind in the upper end residential REIT market in general, just that some are better or worse then others.) It seems to my (admittedly novice in finance) mind that there is a huge gap in understanding what must happen to all this high end residential real-estate coming on line as the limited demand for this high-tire stuff is drying up.

    Indeed every time I have talked to residential REIT-owners in the last few months I find them proud of their often completely un-diversified investments, and even condescending that anyone would invest in anything else (“The fools! look at my 14% dividends!”) When I try to point out some of the things you have covered in your article here, Wolf, I usually just hear some variation of “look, people keep having babies, and as long as that is true real-estate will always be a good investment.” Pointing out that most of the people having babies can’t afford the high end real-estate that comprise almost all of the residential REITs usually just gets me laughed at in a “you poor simple fool” type of way.

    In short, thanks for your article here, without it I keep feeling more and more like I am a crazy person.

    Also, a related question that I have been wondering about to see if you have some good incite on it: One of the things you cover above that I would normally agree with, is that in theory with a vast glut of oversupply in the high-end residential rental market prices are going to have to come down. One thing I have begun to wonder about however, is that if beyond the obvious large margins with the greatest return on investment per square foot, the appeal of upper end residential building to investors is that it also gives them a bargaining buffer to be inflexible. This is to say: with a hypothetical lower-end lower-margin apartment complex, the owners might have to more-or-less fill the complex for it to be profitable. Thus, if their building goes unfilled they are going to have to lower rents to maintain profitability. Meanwhile on the high-margins higher-end apartment complexes, if the owners fill only a fraction of the building it may still be enough to be profitable given the high margins, and so even if the building is no where near capacity these high-end investors may have no incentive to lower rents, and instead just opt to keep most of the units off the market and hold out indefinitely for “better times.”

    Again just a thought that has been bothering me that could be totally off base, but I was curious about your take on it Wolf.

    • Petunia
      Oct 3, 2018 at 1:46 pm

      In Florida many of the high end buildings that don’t fill up with regular tenants do short term rentals, furnished apts on a month by month basis. These can be either condo or rental buildings.

      • Nat
        Oct 4, 2018 at 11:42 am

        I am sure, but even that has its limits, if things are truly glutted there is only so much return on short-term rentals one can make without having to make price concessions. This skips my primary comment and question I am asking by just pointing out there is is an extra little buffer before price concessions need to be made.

        • Petunia
          Oct 4, 2018 at 5:06 pm

          This practice hides rent reductions because the short term rentals usually get hidden under other income categories. Don’t underestimate the number of these going on in a hot and transient market like south FL. I understand you can find these in large numbers on AirBNB.

    • Petunia
      Oct 3, 2018 at 1:53 pm

      P.S.

      When developers have “unlimited” money from investors they have no incentive to move units. They simply go back to the well. There is no bank threatening to foreclose on their projects. They are not losing their own money.

      • Nat
        Oct 4, 2018 at 11:45 am

        Well but this is only a little bit of a stop-gap too, because once the investors get sufficiently burned they are going to stop investing in these types of projects. So what you are talking about here may delay the inevitable market-comeuppance and build the glut even bigger then more efficient markets would allow, but again has nothing to do with either my comment or my question about how the glut is eventually digested and what it means.

        • Petunia
          Oct 4, 2018 at 5:12 pm

          Eventually an empty or near empty building is sold in foreclosure or dumped by the investors at a loss. Either way the rents get readjusted by the lower valuation. That’s how all RE gluts get absorbed.

  3. Bobber
    Oct 3, 2018 at 12:59 pm

    I don’t know. I’ve seen plenty of “high end” apartments with dog droppings in the elevator and sounds coming through the walls. I don’t think there is a true “high end” when you are talking about cramming 1000 people under one roof.

    Eventually all these “high end” buildings will convert to less desirable complex’s over time. The pricing gaps listed in the article are not sustainable for very long.

    • Petunia
      Oct 3, 2018 at 1:36 pm

      I seen plenty of high end buildings in New York City — Park Ave., Gramercy Park, Fifth Ave., etc. High end is location and exclusivity, it has nothing to do with building construction. What makes it high end is safety/privacy, exclusivity, and convenience.

      • Apex
        Oct 4, 2018 at 7:13 am

        Privacy implies a bit of quiet and not noisy slum dwelling type living. Hence better insulation and higher cost. This is not rocket science and is very much part of design from the beginning.

        • Petunia
          Oct 4, 2018 at 5:20 pm

          Maybe NYC is a unique market, but in the 1970-80’s those creepy buildings down in SOHO hid some spectacular interiors. Money in NYC can improve any interior so it usually isn’t a consideration when buying high end RE.

    • Ed
      Oct 3, 2018 at 3:51 pm

      The U.S. gets this wrong. Wood construction, little sound proofing. One can pay $2000 per month and hear all the neighbors’ conversations! (High rises or any concrete construction fixes this, usually. But that’s uncommon.)

      Lots of money. Bad quality of life for apartment dwellers in most of America.

      • Oct 3, 2018 at 8:37 pm

        In urban cores, most of the new construction with 50+ apartments — the subject of this data — are high-rises made of steel or concrete. Steel carries the sound very well, despite the insulating materials used to cover it, and so super-high-end buildings are often made of concrete. This was the case with the Millennium Tower in San Francisco, which has sunk 18 inches since 2009 and is leaning because it’s sinking more on one side than other.

  4. Oct 3, 2018 at 1:03 pm

    Can you write a piece about how high-end in San Francisco are effecting people in Oakland

    • Oct 3, 2018 at 3:05 pm

      This is truly an issue. I mention Oakland periodically in my rent articles. This market is heavily impacted by the dynamics in SF. The thing I have noticed is that rents in Oakland are lot more volatile than those in SF. When demand from SF flags, and “SF housing refugees” stop flooding into Oakland, “asking rents” drop sharply in Oakland because suddenly, the high-dollar demand has dried up and landlords need to deal with local realities.

      If I can get good data on, I’ll try to figure it out and write about it.

      • TCG
        Oct 3, 2018 at 7:51 pm

        Tons of new residential is coming soon in Oakland uptown area (if that arsonist doesn’t burn them first as has happened to a couple buildings). I’ve counted at least 4 or 5 buildings and many are tall like 20-ish stories and will have a lot of units.

  5. MF
    Oct 3, 2018 at 1:05 pm

    I was in a meeting several years back with a group focused on affordable housing. I was advocating for finding market-based solutions for households earning ~$33,000/year (38-ish in today’s $$). My research showed that this market segment was not only large, but not being served. If we could crack the zoning nut, we’d have the market to ourselves.

    Everyone got a constipated look and silence befell the group.

    Finally, a well-heeled Millennial (raised on Mercer Island, WA) said: “I really think we should look toward households at the $75,000 level and up. That’s where the money is.”

    Everyone else looked relieved and all nodded in unison and started fawning over the young man and his “innovative” suggestion.

    Later I asked each individual involved about their perspective and why they supported what they did. Turns out “affordable” was only interesting insofar as it was “affordable” to themselves — at their income levels. Serving “poor” people felt … well … dirty.

    • Petunia
      Oct 3, 2018 at 1:39 pm

      The easiest way to help poor people is to give them money. Everything else is a jobs program for the better off.

      • kitten lopez
        Oct 3, 2018 at 2:27 pm

        you STILL make me quiver.

      • Kevin
        Oct 3, 2018 at 2:42 pm

        Giving more money to the “poor” just results in a higher level of income being the benchmark for being poor. For example, the poor in the USA are rich compared to those in developing nations.

        There will always be those who have less. Only by changing the ethics and environment of the individuals can change be effected, and then only at an individual level. Unless an individual is willing to make the (often uncomfortable) effort to gain wealth they will not, and that is too often fostered by society and expectations of entitlement.

        • Bookdoc
          Oct 3, 2018 at 2:51 pm

          One of the best answers to that concern I have seen. Thanks!

        • Petunia
          Oct 3, 2018 at 3:51 pm

          I was specifically referring to programs and people who are trying to “help” the poor. Every anti poverty program is a jobs program for middle class professionals and a money maker for the elites. If you want to feed the hungry or house the homeless, give them the money directly. They will solve the problem more efficiently than any program can.

        • Neal Woods
          Oct 3, 2018 at 4:11 pm

          Right, after all: If you add to 5, you just make 6, but it’ll still be less than 10. But doing this bloats the scale to 12. So why add to anything for any reason?

          You make it sound like future (actually, present) generations aren’t entitled to things like the Brooklyn Bridge or the Roman aqueducts. But they are by virtue of resources being available. I can tell you’d rather see things hoarded or unutilized than distributed to people who did not or did not get the chance to “earn” them, and that attitude ought to be reconsidered.

        • Bridgetown Beast
          Oct 4, 2018 at 4:25 pm

          If merely working hard was all it took to obtain prosperity then janitors would be millionaires. The poor are being hedged out of every opportunity that was once available to them by cuts to infrastructure that provides for the general welfare. Schools, safe housing, jobs with prospects for decent pay and safe working conditions are all being taken from them by people who probably never had to work a day in their life to afford the largess they possess. There are a lot of reasons why it’s exponentially more difficult for them to obtain the training and jobs you are implying, and even more reasons that if they could those jobs would suddenly not pay enough to afford a working class. The hollowing out of the world economy by rent seeking parasites is the reason that those who will “always have less” have so little that they can’t even afford to feed their children and not some nebulous sense of entitlement. People working a job should be able to afford to house and feed themselves, not to mention people working more than one job, and that’s no longer the case anywhere in the country.

      • MF
        Oct 3, 2018 at 4:41 pm

        Note that “poor” was in quotes. I wasn’t proposing to serve the poor. I was proposing to serve working families — a legitimate market. Yet my colleagues heard “poor” even though I never said it.

        Interestingly, the replies to my post are exclusively about helping the “poor” even though the post itself is about exploiting a specific market.

        • Petunia
          Oct 3, 2018 at 5:53 pm

          Most poor people work and still qualify for subsidies. It’s a national disgrace that the working poor can’t afford housing or food in the richest country on the planet.

        • Crysangle
          Oct 3, 2018 at 6:42 pm

          Now you are getting yourself into hot water MF, talking about “exploiting a specific market” instead of just using the word poor ;-).

          But Petunia has it right I think, Kev is talking about effecting change on the individual, when actually it is the reverse needed – leaving individuals to achieve in a relatively unhindered manner. The hinder ranges from unethical legislation, price gouging via finance, social management… but you have to be very careful if you argue this out because you end up talking past each other very quickly…i.e. the ethic of letting people starve to motivate them vs that people don’t usually put themselves in a circumstance where they starve unless they are already (made?) dependent beyond being able to self organise.

          As I don’t want to be caught in any cross fire I now proclaim own quietness.

    • polecat
      Oct 3, 2018 at 6:14 pm

      Well hey ! Urban living is waaaay cool (as our good host states), up high in cloud of luxury towers ..
      What he didn’t mention was all those needles and piles of sh!te one has to tippy-toe around, along with the not-so- occasionl untouchable, to get there !

      Hippity-Hop .. over the stinky, dirty glop … and remember to condescend towards the ‘help’ at all costs, even as they migrate to the temporarily, more affordable hinterlands ..

      • Oct 3, 2018 at 8:56 pm

        I actually like it when these needles-and-feces stories get spread. I hope they scare people out of moving to San Francisco. Or even visiting. It’s way too crowded here, too expensive. Congestion is insane. You can’t get into restaurants. Trying to drive across SF on a Saturday at noon drives you nuts. Way too many people want to live here. This needs to stop. We’re full. So keep spreading those stories, and eventually they might have an impact :-]

        • polecat
          Oct 3, 2018 at 9:40 pm

          Wolf,
          I used to go visit friends in the bay area ( this was mid 80’s- 90’s) .. and, while traffic was bad, and things were kinda seedy .. depending on where in SF one happened to be .. I can hardly fathom just how bad things have er .. developed .. on that peninsula.
          San Francisco ALWAYS had an air of funkiness to it that I found interesting, but now would have no desire to visit, considering how surreally awful things have become. Imagine how different, or the same .. depending on ones’ perspective .. things might’ve turned out, had Silicon Valley not materialized in the that it did .. would’ve made for a more livable, and sane existence.
          Of course, the same could now be said for just about any contemporary U.S. urban concurbation !

        • Lao Bai Xing
          Oct 4, 2018 at 4:53 pm

          Bravo, Wolf! An enthusiastic second to your discouraging advice. Even Bernal Heights feels crowded at this point.

        • Buckaroo Banzai
          Oct 5, 2018 at 12:16 am

          For over a decade I visited SF on business a couple times a year. The city deteriorated markedly during that time span, to the point where SF became my least favorite domestic destination. Last time I went was 2013. I don’t plan on ever returning.

    • Bet
      Oct 3, 2018 at 10:29 pm

      I grew up on mercer island. The name it was called back in the late 70’s and 80’s was “poverty rock”. Happy I left it for good two years back ,I never fit in. Guess I didn’t embrace the well heeldidness and smugness and aura of entitlement.

  6. Guido
    Oct 3, 2018 at 1:07 pm

    I wonder if prop 10 in California is being pushed forward by one of these entities to create a demand.

    • alex in san jose AKA digital Detroit
      Oct 3, 2018 at 5:13 pm

      The landlord class is pumping a LOT of money into “No on prop 10” ads so if they hate it, it’s like as not to be something good. I’m voting for it.

      • Oct 3, 2018 at 8:48 pm

        The other day you said (if I remember right) you’d vote against it. What changed your mind?

        • alex in san jose AKA digital Detroit
          Oct 3, 2018 at 11:59 pm

          In short, NPR and poor 80-year-old Mr. Rodriguez.

          I reflected on old Mr. Rodriguez being interviewed on NPR, and reflected that with the bales of money being spent to try to not pass it, it’s got to be good for us in the 90%.

  7. arthur
    Oct 3, 2018 at 1:14 pm

    Building for the high end makes sense if you can still break even if the apartments can be rented for 1/2 their initial high end prices.

    That’s the big question. Can these projects remain profitable if they cut the rents?

    Good business sense or possibly a disaster. Maybe they will convert them all to condos if they can’t rent.

    I can verify that outside New York, all I see are many new complexes that are high end that will be coming on line in the spring. Rents all north of 3000/ month for a 2-bdr.

  8. Ripp
    Oct 3, 2018 at 1:30 pm

    I’ve been looking for a new rental, and I’m shocked at how many of these “luxury” complexes have 20+ available units all the time. None of them have resorted to lowering rents to fill these vacancies. Must be making plenty of profits off the lovely folks already locked in to those crazy rents.

  9. Otis
    Oct 3, 2018 at 1:38 pm

    All the new “high end” apartments I have seen are constructed in the same very cheap manner. It’s a joke:

    Hi-Wall AC in living rooom with no ducting to bedrooms. Cadet wall heaters in the bedrooms. Hard fake wood floors. No water pressure. No fuly opening windows. Ikea quality particle board cabinetry. Frequent fire alarms in the middle of the night. Noisy, usually built on top of a busy street or highway. In Portland the higher end streets have the most vagrants.

    Almost none of these units are interesting on the inside. All are imposing boxes on the outside, usually with a little protrusion here or there or on the roofline to hide that they are merely utilitarian boxes. Maybe the non opening windows are staggered in an unusual way. Still, boring boxes built to the max square footage.

    I’ll take an apartment built before 1940 every time. They have a more human scale and pride in craftsmanship that is not available in new commodified “luxury” apartments.

    • NotBuying
      Oct 3, 2018 at 1:53 pm

      I agree Otis, there is no such thing as artistic architecture anymore. It is all done at the lowest cost. Almost seems communist the way these buildings look (100% utilitarian, with some paint slapped onto the side for good measure), yet they market them under the farce of “luxury”. What a joke! I used to live at one or two of these, and they just aren’t worth it. If you look for smaller property management companies instead of the large MBS conglomerates, you can usually double your square footage per dollar, and they don’t treat you like a child with imposing fines and regulations, and the maintenance requests are much faster to boot.

  10. JM
    Oct 3, 2018 at 2:02 pm

    Some months ago I read a blog post about Chinese investors being suckered into real estate deals where they would put in IIRC $500,000 to potentially qualify for a US residential visa, though that would only get them on the waiting list, with no guarantee of ever actually getting one. Might they be among the sources of funding, especially since it is said that when they buy investment apartments in China itself they prefer that they remain vacant?

    • roddy6667
      Oct 3, 2018 at 8:26 pm

      The investment homes in China are sold as concrete shells, as are all new homes. If a person if buying it for future use, they leave it unfinished. It takes another 20% to do that. If a family is buying the home for their son when he gets married in ten years, who knows what styles and features the couple will want? Leave it unfinished. The same with investments. Don’t waste money buying things a buyer might not want to pay for in 10 years. Homes are made of concrete. They can be kept for decades without needing maintenance.
      That has contributed toward the “empty cities” meme that you see on the Internet, but not in China. The home ownership rate nationwide is 130%. In some cities it is 200%. It is not evenly distributed. People buy homes for future usage in new construction. What does this look like? It looks like 50% or more of the units are empty, which they are. American writers rush to pronounce this as a failure of the Chinese real estate market. Little do they know that these homes were purchased for cash before they were even finished. It is a symptom of wealth and prudent money management, not failure.

      • CrazyCooter
        Oct 4, 2018 at 7:05 am

        “Little do they know that these homes were purchased for cash before they were even finished. It is a symptom of wealth and prudent money management, not failure.”

        /Giggles

        Then what has the absolutely epic credit binge in China been blown on … ?

        HINT: there is A LOT of speculation out there …

        Regards,

        Cooter

  11. Gian
    Oct 3, 2018 at 2:03 pm

    A good friend of mine is an artisan contractor in southern CA, who for the past 7 years, has been extremely busy building “affordable” housing and making bank. It appears the funding is a cooperative among banks, local governments and developers to mass produce these multi-family complexes and provide housing for the less well-to-do. Based on how busy he is, I suspect these too are being overbuilt. It seems reminiscent of the SFR bust which saw major developers and contractors go broke and leaving behind many unfinished tracts.

    • TheDona
      Oct 3, 2018 at 4:43 pm

      Gian, are these areas nearby wealthy enclaves? The wealthy need service providers.

      Aspen has was is called “Workforce Housing” in nearby communities.

  12. Doug
    Oct 3, 2018 at 2:07 pm

    Here in KC affordable now means $1200 a month and all new apartments in the downtown area are marketed to millennials . This means dog park , dog wash and barista bars and sometimes roof top bars .They are so dog crazy they recently opened up a dog bar that you can take your dog to , since they have no kids , dogs are their substitutes . I believe there are 10 to 15 buildings under construction and for some reason , now all new construction seems to be very ugly and boxy. This ugly construction seems to be taking the country by storm but at least they have nice dog amenities . When the first 2 new luxury apartments did open downtown it was the penthouses that filled up first .

    • Harrold
      Oct 3, 2018 at 2:44 pm

      Children are too expensive these days.

      • polecat
        Oct 3, 2018 at 6:20 pm

        Pets = Children by proxy, in that you wovvv them, and care for them, until in 20 years or less, they die !
        Repeat ..

      • saylor
        Oct 4, 2018 at 3:07 pm

        My parents never really did get an ROI on me. LOL

  13. MC01
    Oct 3, 2018 at 2:10 pm

    That’s a common trend worldwide: targeting that top 5-10%. See the empty units going on the market for €210,000 in depopulating towns in the Pyrenees, or the €250,000 in industrial towns in Italy chocked by empty, abandoned and absurd developments. Unless you are a REIT believing your own lies, you won’t even look at those money pits.
    That’s when those apartments will be pitched to retail, often with an assist from our old friends, Italian and Spanish banks. Retail walking into these ‘deals’ is like an infantry platoon walking into an ambush.
    Let’s see how long before they can recover their ‘investment’. These retail landlords tend to hold on to impossible rents for way too long, before raising a white flag, selling out (if they can) and licking their wounds. You won’t find these stories in the newspapers: everybody ‘investing’ in real estate is a winner there.

  14. J Bank
    Oct 3, 2018 at 2:42 pm

    Developers are going to develop… that’s what they do. They’re not going to make mid-market and low end housing–the economics aren’t there.

    The cost of building isn’t in the finishes. It’s mostly in construction materials and permits / soft costs. If it were up to you, you would err on the high side too! Why not pick up some tenants that will pay outlandish rents then lower the rest to market if you’re going to take the risk of building one of these things. It won’t take too much to cover the costs of the finishes.

    That said, Wolf, it WILL create downward pressure. Once rents get dropped to fill these units, people that can afford to pay the same or a little more for a better place to live will. Then it will be a domino effect.

    Couple that with first time buyers beginning to buy homes (finally), and there will be a severe depletion of demand.

    There have been a lot of people thinking you can’t lose money in multi-family real estate lately. Should make for an interesting few years.

  15. Kevin
    Oct 3, 2018 at 2:51 pm

    How much pressure can we expect from Fanny Mae and Fanny Mac to lower rents? I doubt there will be any, as they will not want to devalue the equity of the property they hold, and they can print the funds to maintain them, empty or not.

    That will just add to the pressure on landlords who don’t have that luxury to abandon profit (hard to do) or walk away from the debt.

    A large percentage of the “homeless” population could be eliminated if the Fanny’s were required to fill their empty residences with such people. And since the gov’t is effectively bankrolling them anyways you would expect that to be a common sense solution. In my mind a residence would be better than food stamps and reduce the tax burden since those properties are already paid for.

    • TheDona
      Oct 3, 2018 at 3:15 pm

      Fill with Homeless who for the most part have drug or mental issues??? The rest of the tenants would walk their lease.

      As it is, the HUD vouchers have ruined many a B or C class. The recipients of the vouchers just can’t seem to follow the apartment rules much less rules of civility.

  16. Boris Vian
    Oct 3, 2018 at 2:54 pm

    This article seems to be too much of a generalization. In metropolitan areas in CA and NY, the fastest growing households are those making +$150,000/yr and those making -$25,000/yr. There isn’t as much growth in the middle. Since developers don’t build for people at the bottom because it’s too expensive, they are focusing on people at the top. Most of the buildings are filling up hence why no one has thought to stop. At some point, they won’t fill up and those units will eventually trickle down to the next level, but that’s how the market should work.
    As far as building B class properties in blue states for people in the middle, it’s become impossible due to high labor costs and excessive regulation. It’s easier to take a C or D class property in an “up and coming” neighborhood and renovate it into B class than to build a B class property from scratch.

  17. ewmayer
    Oct 3, 2018 at 3:03 pm

    Thanks, Wolf – this piece addresses the “are the numbers being skewed upward by high-end apartment building” issue I raised in my comment to your 28. Sep. “The Rental Markets in America, from Hot to Cold” article.

    It’ll be very interesting to see how the downward-pressure-from-the-top-end pricing dynamic you describe plays out – I’m still seeing a lot of evidence of complex owners preferring to leave many units vacant rather than lowering their ask, apparently due to the “once you start dropping rents, word quickly spreads from the new renters to the established ones” worry.

    • Oct 3, 2018 at 8:21 pm

      The main reason for not dropping rents to fill vacancies is the way rent factors into asset valuation.

      The current investing landscape is about maximizing valuation rather than income.

      If you can model a high value based on absurd rents and gloss over the vacancy rate as a temporary thing, you can sell those REIT shares a lot higher.

      These places have more than enough cash flow from investors, so they aren’t under the gun to get cash from operations up.

      • QQQBall
        Oct 4, 2018 at 8:35 am

        Rent concessions will be free rent. The developers have construction loans that need to be refinanced when stabilized. Effeective rents will be well below contract rates, but if they can get the bank/appraiser to bite on the higher rent, then they get moar loan bucks.

  18. MCH
    Oct 3, 2018 at 4:40 pm

    I would be very curious on when the market finally turns on the rental situation in SF. Up until now, it’s essentially floated on the tech bubble. The 101 corridor is full of new constructions for high end apartments and condos. It is just insane.

    I’m still amazed how people continues to come to CA in spite of the tax situation and the overall high cost of living.

    • Bobber
      Oct 3, 2018 at 5:25 pm

      The immigrants to CA are all going to get rich off stock options (in their mind), so just about any rent is justified. They should do a poll to see what percentage of tech engineers in SF/Silicon Valley think they are going to be worth more than $100M some day. I bet you its higher than 50%. The best way to make money is to serve highly aspirational customers, even if they are irrational.

  19. Oct 3, 2018 at 6:41 pm

    Flooding the market with high end housing is a good thing – as long as they provide the right incentives to fill them up.

    I would really like to see enough people drawn out of existing units to drop those rents back to where they were just 5 years ago. The current owners got a free windfall that us working stiffs are expected to pay.

    A 280sqft studio in Van Nuys filled with roaches starts around $1350 these days (was $1100 just a couple years ago) – and some of them still have long-term tenants renting the nicer 2-bedroom units at $1000-1200/mo on rent control.

  20. George McDuffee
    Oct 3, 2018 at 6:44 pm

    It may be necessary to “help” the market by imposing a progressive “vacancy tax” that increases the longer the unit is unoccupied to prevent market manipulation and artificial shortages to keep rentals high. People can’t wait for years for the free market to normalize prices — they need someplace to live NOW.

    The alternative is the construction of massive amounts of municipal/public housing, and we all know how well that works…

  21. Saver
    Oct 3, 2018 at 7:38 pm

    I love these apartments, we do all the fancy electronics in them, making a killing the past few years and looks like we have another year or two to run. We do these in the midwest and sad part is when we come back for warranty work or support seems like vacancy is a huge issue, normal people cannot afford $2400 for a 1 bed around here (IN) and there are another 3000 high end units coming online in the next 6 months. I keep telling my subs and friends keep your money, this won’t last but they get the best F250’s decked out with everything. This is a train wreck waiting to happen. Just got done with a big complex, it has a 1/2 acre dog park but not even one swing set, as a parent this seems like a joke.

    • Ed K
      Oct 3, 2018 at 9:31 pm

      Swing Set = liability and a big lawsuit the first time a child gets hurt. In any case, luxury apartments are not marketed to families.

  22. theW
    Oct 3, 2018 at 8:27 pm

    When I was searching for a place to live in the Denver area earlier this year, I would see how many rooms were available (or soon to be) in a complex, and tried to negotiate my rent based on their vacancy rate.

    My experience was that although there are plenty of empty rooms out there, the anti-gravity field surrounding rent is enormously strong. My argument to my future landlord was how much “inventory” was sitting on her “lot” month after month. Instead of lowering prices to fill rooms (and alleviate Denver’s “housing shortage” lol), her benefactors were forgoing ~$208,700/mo in favor of keeping rates high.

    Maybe those rates are required to eventually balance their books, but I suspect the high rates are being used to subsidize the empty space until more me’s move to the area. They were willing to offer concessions (free month’s, waived fees), but the published rents hold precariously firm.

  23. James c Allnutt
    Oct 4, 2018 at 12:40 am

    As a broker in Los Angeles, every vacant lot of any decent size has a bidding war causing developers to overpay for the land. This then translates into the need to only build high end priced apartments. There is a massive over building going on which 2 years out will cause foreclosures as rents have to be cut to the level where even 100% occupied building will no longer cash flow especially when many loans have interest rates adjusting upward.
    Declining rental income + increasing mortgage payments = foreclosure

    • saylor
      Oct 4, 2018 at 3:02 pm

      Hmmm,, it may be worthwhile to compare the “massive overbuilding” that will come on line in 2 years to the ongoing and projected influx of people into the L.A. area that want urban living (total sum, not just high/middle income)

  24. B Wilds
    Oct 9, 2018 at 5:51 am

    My frustration with America’s housing policy boiled over when I read a piece about how roughly 80% of new apartment construction was for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the growing number of tenants that are irresponsible.

    Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments and dumps the rest on the private sector.

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