One of the hallmarks of the current development boom has been the degree to which it has been focused almost exclusively on high-end apartments. Proponents say it represents a change in our housing preferences, with more and more higher-income households choosing to rent amenity-rich apartments. Critics point out that the nation is facing a near crisis-level shortage of affordable housing, yet the only properties being built are pricey Class A+ or luxury ones.
The apartment boom also has gotten more media attention this cycle than in the past. The homeownership count continues to edge downward, millennials are flooding into cities looking for the hip urban lifestyle, and baby boomers are downsizing and choosing to rent. Given the media headlines, it can be tempting to make this trend toward higher-cost, higher-rent infill construction seem like a new phenomenon. But it’s not. Conventional wisdom has long been that the only new developments that pencil in most areas are either high-end or low-income housing tax credit properties.
But old trend or new, a common worry is whether the industry is in danger of overbuilding the high end of the market. At the National Multifamily Housing Council, we heard this same refrain a year ago, two years ago, even three years ago in some markets. Yet, in most cases, demand has held up better than many expected, resulting in good absorption of the new supply of higher-end units.
Consider that in Denver, we have added nearly 30,000 new units over the past four years and are expected to add another nearly 12,000 in 2017. It’s fair to ask whether this can continue. After all, how many people can afford to rent these units? Mark Obrinsky, NMHC chief economist, recently looked at large, public microdata sets to see if we can get some valuable insight into who’s renting these high-end residences.
While a definitive conclusion is impossible, our analysis suggests that there are still many households – even many apartment renters – with sufficient income to rent new Class A apartments. Potential pullback in demand for these higher-end units in the future is more likely to reflect changes in resident preferences than affordability, with some residents perhaps choosing to spend less on their housing or opting for different types of housing altogether.
Many upscale renters downsize from single-family homes. Identifying “luxury” apartments using public micro datasets turns out to be challenging because they lack class ratings (A, B, C, etc.) since there is no uniform agreement on how to define these class ratings. We could theoretically use the apartment characteristics that these data sources provide to try to create our own ranking system. But the data sets are missing one critical piece of information – namely, exact location.
Instead, we looked at apartments where the rent is at or above the 90th percentile of all apartment rents in the same metro area, which we’ll call upscale apartments. While an imperfect measure – what qualifies as luxurious or upscale differs across diverse metro areas – it is, nonetheless, a useful proxy in gaining perspective on the high end of the market.