U.S. Developers Focus on Luxury Apartments Puts Added Pressure on Renters

U.S. Developers Focus on Luxury Apartments Puts Added Pressure on Renters

Residential News » Tampa Edition | By Michael Gerrity | August 20, 2015 9:08 AM ET

According to CBRE Group, the continued delivery of high-end rental housing--along with a lack of newly constructed moderately-priced apartments--is contributing to strong overall rent growth. While this has left the budgets of many middle-class renters feeling tighter than ever, it presents above-market opportunities to multifamily investors.

The luxury development trend began in Texas in the early- to mid-2000s when developers identified an opportunity in the residential real estate market: luxury for-rent apartments. By 2006-2007, apartments in new buildings throughout several Texas markets were leasing for more than 40% higher than the market average rent (i.e. new construction premiums were above 40%).

The same trend is now developing in many different markets. Of the 179,000 units completed across 62 U.S. markets in 2014, approximately 80% carry rents in the top 20% of the market they were delivered to. For example, the new construction rent premiums in Tampa and Los Angeles are just now reaching 40%.

In markets where new construction premiums experience strong growth, a peak is likely to occur. According to CBRE research, once a peak is reached the average rent for existing apartments begins to grow relatively quickly; luxury buildings that were built recently (but are no longer considered new) also place upward pressure on the overall market rent.

Over the period 2006 to 2015 a shift took place in nearly every market. Those markets with relatively high 2006 new construction premiums no longer have them today--in part, this is attributable to the early movement to luxury development and the subsequent accelerated rent growth of older buildings that followed--while those markets with low premiums in 2006 have much higher premiums today as the trend toward luxury development began taking shape later.

While all rents grew over this period, the rate of growth for a particular building depends on its age and when the trend towards luxury development in that market was first adopted. For example, in markets such as Austin that saw an early move to luxury, the rents of older and existing buildings have grown much faster in recent years; while in markets such as Tampa that are experiencing a more recent move to luxury, rental growth for new apartments is beginning to outpace the rent growth of older and existing buildings.

Peter Donovan, Senior Managing Director of Multifamily at CBRE commented, "The age of an apartment will factor differently into its rent growth depending on how far along its markets is in adapting to the trend toward luxury. These trends present opportunities for multifamily investors to time the cycle and achieve above-market performance.

"In markets like Austin and Tampa, which have seen strong rental growth for new-build apartments, a peak is likely to occur. If Tampa behaves like Austin has done then we should expect the rents of older properties to begin growing above the market average to bridge the gap of the new construction rent premium--a value-add or rehab of an older building could capitalize on this. In the less-established rental markets where new construction premiums have not experienced an upward trend, there are real opportunities for high-end apartment development."

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