Mid and Low Tier Rentals Scarce as Prices Grow

Mid-tier and low-tier apartments for rent have grown more and more scarce as developers continue to build a higher percentage of luxury rental apartments across the United States.

Despite the multi-family construction rate maintaining its high levels, most of these homes, 80% in fact, have been built in the luxury sector, while mid and low tier apartments have become increasingly scarce.

Based on construction costs for apartments across the United States, any developer would prefer to build luxury rentals, particularly over mid-tier rentals. According to Realtor.com, one company, AvalonBay Communities, on average spends $340,000 per unit, requiring a monthly rent of $2,900 to make up for the costs and have the venture be profitable. After the unit is built, adding luxury style amenities such as stainless steel appliances and granite counter tops are very cheap, yet these upgrades can bring in far higher rent if the unit is listed as luxury.

In lieu of luxury apartment construction, mid-tier and low-tier rentals have not been built, keeping competition and prices very high. Supply of low-tier apartments fell by 1.8% since 2008 while luxury apartment inventory has increased by more than 30% in that time frame. Historically, builders were able to create low-rise apartments in suburban areas to lower their own costs. However, government officials across the US have pushed more and more for mid-rise to high-rise buildings, which helps avoid sprawl, but also leads to high costs and therefore luxury building. Whether builders will eventually revert back to low and mid-tier apartments is yet to be seen.

Rising rental costs have not alleviated this issue. Although rent rose for types A B and C apartments, mid-tier saw the highest growth rate. Class B renters saw their rent jump 5.8% in the second quarter of 2015. Rising rent costs have also pushed many mid-tier apartments closer to the luxury market, leaving mid to low middle class scrambling to find affordable housing.

Rent has risen consistently over the past few years. Increasing inventory and improving first time homebuyer confidence will help alleviate these costs. Ideally, more renters will look to buy a home in the following years, deepening the for sale housing market, while lowering competition in the rental market.

Source: http://www.realtor.com/news/trends/rents-rise-faster-for-midtier-apartments-than-luxury-ones/