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This is something I've studied for a while, but now that I'm looking to move to a new city to start adulting, it's really came to the forefront of my mind. We're obviously in a crisis with an over-abundance, over-reliance, and over-production of "luxury" apartments and condos.
I know why they're being built, but when is it going to end? And when are cities going to do something about it? Cities that currently are, what are they doing? I'm seeing a lot of "we have to get this under control" from mayors, but not really seeing the effort. They're just allowing out of state investors to keep pouring in and jacking the city up. Rents have skyrocketed all over the country because of these places and affordable housing has been neglected. It doesn't help that apartment building in the suburbs have slowed.
All this has been based on a myth that Millennials and elderly are flooding the cities and want that "walk everywhere, stylish lifestyle", but in reality the suburbs are still getting most of the growth. And we saw that backed up with the last census numbers. Luxury apartments in cities all over the country have many units sitting empty and they're starting to break out incentives to get tenants. Why not just, ya know, lower the rent?
Bottom line is we just can't afford it. Housing is skyrocketing, but wages are barely moving. Not to mention this craze is changing the culture of our cities and putting low income residents in a big hole. Developers think we (mainly Millennials) just have to have a pool, gym, doorman, stainless steel, grills, flatscreens, keyless entry, a dog park on the roof, pool tables, Xbox, coffee bars, hardwood, computer lab, tanning bed, and large windows, but in reality we don't. They don't even work half the time. We sign up for these places because we really have no choice now (and because of the heavy marketing). Most cities it's either A. do the luxury, B. do an older, less kept place in a probably less safe area, or C. live way far and deal with a pretty long commute, which isnt healthy (end the 9-5, people!).
From 2012-2014, 95% of the apartments Atlanta built were luxury. In Nashville you have some places charging $1400 for 500 sq feet to live next to crummy warehouses with no grocery store nearby. And while NYC is building units, they're building for the ultra rich, who arent using these units to live in, but to park their money. That's driving up everything for natives. I read somewhere that 432 Park Ave in NYC sits 19% full most of the time (though that might be a little dated). Much of LA's building boom is thanks to Chinese investment. Seattle is getting a good taste of Chinese as well, and Miami is relying on a lot of foreign money for all those condos being put up, but foreigners, especially Russians, are starting to pull out, leaving the units empty as many of us Americans cant come in and snatch it up. The owners of LA's new tallest tower are Korean. Also not to mention that many of these luxury projects are being funded by loans and whenever the next recession hits, investors are planning to give the building right to the bank.
Most middle and lower class Americans can't afford these places, and the country is getting squeezed like juice. The characters of our cities are changing, and many (but not all) of these developers and investors really don't care about the city or it's residents, but instead just see $$$. When is the bubble going to pop on this? Or when are cities going to actually implement more affordable housing demands to developers or do something to curb all the foreign ghost buying? Will regular complexes that dont come with all the bells and whistles ever make a return?
And it's not just apartments for "stylish" Millennials. These things are popping up on college campuses everywhere as well. Many colleges they're now the required housing for athletes.
Many economics feel a glut is coming, and I think it's obvious to most of us folk that many of these places are way overpriced for the average salary in our city - and for how much sq footage you get. What's yall feelings on this, because many metros across the country are dealing with this problem. It's not just the "it" cities.
Rents have been rising, but development costs have been rising even faster in many places.
In my region, construction costs have been growing 5% per year. Land prices have been growing much faster than that in the high-demand districts like those with good transit. So rents rising maybe 6-7% per year are just keeping even. The 5% will be mirrored by large increases in other cities.
As for amenities, some are required by the land use code. The remainder aren't necessarily that much in percentage-of-cost terms. But they're expected by some renters. So maybe you could knock 5% of the development cost by stripping out extras, but would you still get within 5% of the rent? In other words, do enough renters value the 5% savings enough to skip the lifestyle stuff? Apparently not.
Of course the urban-type cities do a lot of buildings that go even cheaper...not much amenity space, little or no parking...that's savings on a larger scale and it's definitely popular.
The surburban example in the photo requires land that's zoned multifamily and probably near a bus line or two but that's still cheap. Especially if it really has surface parking. In urban cities and their fringes, land is typically too expensive for that.
This is a major problem in many hot markets. I think we're generally going to a model that looks something like the following.
The "sexy" interior urban metros (Denver, Nashville, Austin, etc.) are having rent and property prices rising much faster than wages there. The people who have been there for years can make out very well, but it's tough to get a start there now, with housing costs and wages way out of whack.
"Ugly" metros like Indianapolis, Cleveland, Cincinnati, St. Louis, etc., will remain relatively affordable with good job markets for the working and lower middle classes. Wages there seem to be higher than in many of the "hot" metros, largely because they aren't hot.
Small towns and rural areas are going to struggle no matter what the property prices are, as wages and job quality are generally just too poor to afford housing comfortably.
High cost coastal areas are going to become too expensive for all but the upper middle class and above and the subsidized poor to live there.
I was making very little money back in 2013 and wanted to move to Nashville. I did get some offers, but they certainly didn't pay commensurate with the cost of living, which I'm sure has risen even more since then. There was no point in me moving from to east TN making $25k/yr or so to Nashville making $35k. Even with that big percentage salary gain, it just wasn't enough to make Nashville work.
This is a major problem in many hot markets. I think we're generally going to a model that looks something like the following.
The "sexy" interior urban metros (Denver, Nashville, Austin, etc.) are having rent and property prices rising much faster than wages there. The people who have been there for years can make out very well, but it's tough to get a start there now, with housing costs and wages way out of whack.
"Ugly" metros like Indianapolis, Cleveland, Cincinnati, St. Louis, etc., will remain relatively affordable with good job markets for the working and lower middle classes. Wages there seem to be higher than in many of the "hot" metros, largely because they aren't hot.
I was making very little money back in 2013 and wanted to move to Nashville. I did get some offers, but they certainly didn't pay commensurate with the cost of living, which I'm sure has risen even more since then. There was no point in me moving from to east TN making $25k/yr or so to Nashville making $35k. Even with that big percentage salary gain, it just wasn't enough to make Nashville work.
Thing is it's not just the "it" cities though, so we can't point all the fingers at Nashville, Austin, Denver, etc. Rent has risen fast everywhere with a lot of luxury building, and wages aren't. 2017 is predicted to be a big slowdown year, and some cities like Nashville have been increasing a lot slower now than before, but we're still not providing enough cheaper options.
Jacksonville, Detroit, Columbus, St Louis, Cincinnati, etc are now over $1,000 average, according to rent jungle. Cleveland and Indianapolis are right on the fringe. All are up from $500-$750 a few years ago. I'm not sure if this covers the city or the metros.
I agree that it is relative to the wages in the city. That's the thing, Nashville, Austin, and Denver are booming and prices are rising for a reason - they're bringing in great jobs. But because of this new building fad, it's raising the prices for everyone who don't need those jobs.
There is this myth that as they continue to build luxury units, those who can afford the rents will move to those luxury units, which will then free up units in the older/cheaper buildings. But there is a problem. Every old/cheaper building will eventually get bought up, then either renovated into a luxury unit, or knocked down to make place for a new luxury unit. The other outcome is that lower income people end up sharing these apartments 2-5 people per unit.
It all started with low vacancy. Construction costs went up, meaning that developers could only break even on units that rented for well over the market rent. Due to job creation in the city center, many of these buildings were reaching full capacity for awhile. Other developers saw what kind of profits they could make on rental units, which then lead to the insane boom of construction. Currently job creation and in-migration is slowing down, but there are still tens of thousands of units in the pipeline. In Denver specifically, 30% of the units that will be built between 2014-2019 haven't even broken ground yet, or are still well under construction. Our rents have finally started to flat line last year, and the city saw 14,000 people less in in-migration for 2016 than 2015.
We are also almost due for an economic slow down, so it will be interesting to see what happens to all of these new units. The cost of construction only increases year-year, and these companies will do anything in order to keep the rent prices up. Apartment Bubble 2020?
To me it's common sense to convert these units into condos, especially considering the pathetically low inventory of condos on the market right now. You would think a market rate sale on a condo would be better than letting units sit empty...
Rents have been rising, but development costs have been rising even faster in many places.
In my region, construction costs have been growing 5% per year. Land prices have been growing much faster than that in the high-demand districts like those with good transit. So rents rising maybe 6-7% per year are just keeping even. The 5% will be mirrored by large increases in other cities.
As for amenities, some are required by the land use code. The remainder aren't necessarily that much in percentage-of-cost terms. But they're expected by some renters. So maybe you could knock 5% of the development cost by stripping out extras, but would you still get within 5% of the rent? In other words, do enough renters value the 5% savings enough to skip the lifestyle stuff? Apparently not.
Of course the urban-type cities do a lot of buildings that go even cheaper...not much amenity space, little or no parking...that's savings on a larger scale and it's definitely popular.
The surburban example in the photo requires land that's zoned multifamily and probably near a bus line or two but that's still cheap. Especially if it really has surface parking. In urban cities and their fringes, land is typically too expensive for that.
Didn't know that about the land use requirement. Pools and gyms seem standard for most places, but as far as tanning bed, dog park on the roof, billiards, stainless steel fridge, etc seem like things the developer wants to throw in to sexy it up imo. I may be wrong.
You make good points with construction costs. It's getting very expensive just to rent a crane in many places.
There is this myth that as they continue to build luxury units, those who can afford the rents will move to those luxury units, which will then free up units in the older/cheaper buildings. But there is a problem. Every old/cheaper building will eventually get bought up, then either renovated into a luxury unit, or knocked down to make place for a new luxury unit. The other outcome is that lower income people end up sharing these apartments 2-5 people per unit.
It all started with low vacancy. Construction costs went up, meaning that developers could only break even on units that rented for well over the market rent. Due to job creation in the city center, many of these buildings were reaching full capacity for awhile. Other developers saw what kind of profits they could make on rental units, which then lead to the insane boom of construction. Currently job creation and in-migration is slowing down, but there are still tens of thousands of units in the pipeline. In Denver specifically, 30% of the units that will be built between 2014-2019 haven't even broken ground yet, or are still well under construction. Our rents have finally started to flat line last year, and the city saw 14,000 people less in in-migration for 2016 than 2015.
We are also almost due for an economic slow down, so it will be interesting to see what happens to all of these new units. The cost of construction only increases year-year, and these companies will do anything in order to keep the rent prices up. Apartment Bubble 2020?
To me it's common sense to convert these units into condos, especially considering the pathetically low inventory of condos on the market right now. You would think a market rate sale on a condo would be better than letting units sit empty...
Great analysis. You're right about the jobs coming to the city center and construction costs, so building prices are shooting up there. My issue is many cities it's becoming a problem city wide, not just the core (where the myth is that all Millennials want to live in it).
In Charleston you have apartments 10 miles from downtown (which is pretty far for Charleston standards, hitting the suburban/rural fringe) that are renting for $1100/month. It's inconsistent because for $100 more, you can rent a mile out downtown in another new luxury place. The 10 mile apartment is definitely way overcharging for it's location. Not only is it a mile from being in rural land, but there's also no jobs over there.
Seems the luxury craze isn't contained to the core. You're now seeing them dotted all across town. You'd think with conventional wisdom, things would radiate. Generally the farther you get from the core, the cheaper prices will be, but from what I'm seeing, it's more of a rollercoaster, at least until you get rural, then prices plunge.
Thing is it's not just the "it" cities though, so we can't point all the fingers at Nashville, Austin, Denver, etc. Rent has risen fast everywhere with a lot of luxury building, and wages aren't. 2017 is predicted to be a big slowdown year, and some cities like Nashville have been increasing a lot slower now than before, but we're still not providing enough cheaper options.
Jacksonville, Detroit, Columbus, St Louis, Cincinnati, etc are now over $1,000 average, according to rent jungle. Cleveland and Indianapolis are right on the fringe. All are up from $500-$750 a few years ago. I'm not sure if this covers the city or the metros.
I agree that it is relative to the wages in the city. That's the thing, Nashville, Austin, and Denver are booming and prices are rising for a reason - they're bringing in great jobs. But because of this new building fad, it's raising the prices for everyone who don't need those jobs.
This is just for me, so I can't speak for everyone else, but when I've applied for jobs in the South, it has almost always been considerably less than in the Midwest. We're not talking a few thousands dollars either - the job I had in Indiana paid nearly 30% more than a competitor company in Nashville, which was a much larger outfit. And this was pretty well across the board for IT/tech work. I tried to relocate to Nashville various times over the years and was never able to get anything that paid decently. Amusingly enough, I was able to keep my Indy salary relocating back to my hometown on the far east side of the state, but this is not a desirable area for working people (though it's great for retirees) to live in. For what it's worth, I had several promising interviews (but no offers) in Tampa and Orlando, and all of those jobs paid higher than similar jobs I interviewed for in Tennessee, and FL is known as a low wage state.
My girlfriend at the time was making $19/hr working the front desk at an urgent care in a small town north of Indianapolis. You'd be lucky to get that $19 in Nashville with a much higher cost of living. Wages in the South are generally low, and the cost of living is generally higher than the Midwest outside of Chicago.
The average person making $15-$20/hr is not going to be able to pay $1000/month+ in rent. They're going to be pushed out to far flung rural areas, increasing transportation costs, or have to get a bunch of roommates. I don't think either is a good solution.
There is this myth that as they continue to build luxury units, those who can afford the rents will move to those luxury units, which will then free up units in the older/cheaper buildings. But there is a problem. Every old/cheaper building will eventually get bought up, then either renovated into a luxury unit, or knocked down to make place for a new luxury unit. The other outcome is that lower income people end up sharing these apartments 2-5 people per unit.
This actually works. But only when there's enough new supply. Sometimes cities with lots of construction are still falling further behind because demand is growing even faster. In the end though, even the boomiest cities typically overbuild at some point, causing rents to flatten. The exceptions are places like San Francisco where supply is always way behind.
It the expensive cities that doesn't work very well for the bottom of the market of course. For that you need some mix of micros, accessory units, subsidized units, etc. And the really undesired neighborhoods tend to fill that role too, though I wouldn't encourage places to try to be undesired.
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