The rent squeeze: Are new-construction apartment rents pushing too many renters away?

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by Dan Rafter

It’s no secret that newly built apartments in urban areas are commanding high rents. But newly released numbers from MPF Research show just how costly new construction apartment units are compared to older, less desirable stock.

According to the firm, the most expensive Class-A apartment units — mostly located in newer buildings in the center of urban areas — rent for $1,663 a month on average in the country’s 100 largest metro areas. That is double the average monthly rents for lower-priced Class-C apartment properties.

In the Midwest, this rent stratification is seen most clearly in Chicago. MPF Research says that the average Class-A apartment in the city — again, made up largely of units in newer buildings in Chicago’s urban areas — rents for $2,170 a month. The average Class-C apartment unit, usually older stock located in less desirable or trendy neighborhoods, rents for just $886 a month.

This means that Class-A apartment rents boast a premium of 144.9 percent over Class-C apartment rents in the city. MPF Research ranks Chicago fifth in this type rent discrepancy.

Boston and the Bridgeport/Stamford/Norwalk area of Connecticut top MPF Research’s list. Class-A apartments in these two markets rent for 169.5 percent more on average than do Class-C units.

Expect the rental divide between older and newer apartment units to continue, too. Research from RENTCafe found that 75 percent of all new apartments built in 2015 were high-end luxury ones.

These higher-end buildings, boasting extensive amenity packages, appear to be drawing a greater number of wealthy individuals to the rental market. The apartment search site said that about 1.2 million wealthy households became renters in the United States in the last 10 years. The company reported that from 2005 to 2015, the number of renter households that earn more tahn $150,000 a year jumped by 217 percent.

The trend, then, is clear: As a growing number of wealthy individuals and households choose to rent, landlords target these big-dollar customers with more expensive apartments in the middle of cities.

“There are people in these cities who can afford these monthly rents,” said Nadia Balint, real estate writer for RENTCafe. “The number of high-income renters is increasing. There is room to grow in the high-end market.”

To prove this, Balint crunched some numbers showing just how many renter households in certain Midwest cities can afford to rent these higher-end apartments.

In Chicago, for instance, the average monthly rent for high-end apartment units is $2,500. Going by the rule of thumb that households should spend no more than 30 percent of their incomes on rent, households that earn more than $100,000 a year should be able to afford this luxury-market rent. RENTCafe found that more than 33,000 renter households in the Chicago market earn more than $150,000 a year and can afford these higher-end apartment units. In the Chicago market, there are roughly 33,000 apartment units classified as high-end by RENTCafe. This means that there are enough wealthy renter households to serve this supply, Balint said.

In Detroit, the average rent for high-end apartment units is $1,520, according to Balint. Households, again going by the 30 percent formula, would need to earn about $60,800 a year to afford this rent. Balint said that there are 1,229 households renting now in the Detroit area that earn more than $150,000 a year.

There are also about 3,000 renter households that earn from $100,000 to $150,000 a year and 3,960 that earn from $75,000 to $100,000, meaning that there are plenty of households that can afford these higher-end rents. In the Detroit area, there are now 2,622 high-end units either on the market or under construction. The numbers show, then, that there are plenty of potential customers for these more modern, expensive units.

In Minneapolis/St. Paul, the average monthly rent for high-end apartments is $1,763, Balint said. To afford this, households would need to earn $75,500 a year. There are 4,934 renter households that make more than $150,000. The number of households that are renting and making $75,000 a year comes out to more than 26,000. The supply of high-end apartments in this metro area now stands at 16,439, meaning that there is plenty of room here, too, for builders to add a greater number of higher-end apartment units without straining the demand for them.

But what about the demand for market-rate or affordable apartment units? Plenty of renters are seeking out less expensive apartment units, and they’d like to find them in the middle of cities where all the restaurants, public transportation and entertainment options are.

These renters will struggle to find new-construction apartments, said Sam Radbil, an author with online apartment search company ABODO. That’s because the new apartments that developers are adding to the middle of big cities fall overwhelmingly into the high-end category, Radbil said.

“The national homeownership rate is falling. More people are choosing to rent,” Radbil said. “It makes sense, then, that landlords would raise the pricing of their apartment units, especially in markets with tighter inventory.”

Brian Graham, certified residential appraiser with the Cincinnati office of Colliers International, said that it is just too difficult for developers to build new market-rate or affordable apartment buildings and make a profit at the same time. The only way this can happen, generally? They need to receive financial incentives or tax breaks from local governmental agencies.

That does happen. But most developers still choose to build high-end apartment buildings in downtown areas, Graham said.

But what about the suburbs? Can renters looking for higher-end amenities find them for lower costs if they move away from the center of cities?

Graham said that the apartment market in the suburbs of Cincinnati is strong today, featuring plenty of new construction. And the new apartments being built here, like in the center of the city, feature strong amenity packages. The rents at some of these buildings are lower than in the city, but don’t exactly qualify as affordable-level.

“We are seeing new projects in the suburbs that are very high-intense on the amenities,” Graham said. “They are catering to renters that don’t want to go into an apartment community that is 10, 15 or 20 years old. They want to rent, but they like nicer things, nicer amenities. They want all the amenities and features that you’d expect of a new high-end development.”

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This entry was posted in Chicago Commercial Real Estate, Cincinnati commercial real estate, Detroit commercial real estate, Illinois, Illinois real estate, Michigan commercial real estate, Minneapolis commercial real estate, Minnesota real estate, multi-family, Ohio commercial real estate and tagged , , , , , . Bookmark the permalink.

One Response to The rent squeeze: Are new-construction apartment rents pushing too many renters away?

  1. Pingback: The rent squeeze: Are new-construction apartment rents pushing too many renters away? — REJblog – David Alexander Realty

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