Saturation of High-End Apartments Boosts Demand for Market-Rate Units
Most of the new construction coming online is higher-end rental properties, which has put a strain on the availability of market-rate units because the housing type has seen full occupancy in today's market.
NEW YORK CITY- Most of the new construction coming online is higher-end rental properties, which has put a strain on the availability of market-rate units because the housing type has seen full occupancy in today’s market. “You don’t see a lot of market-rate apartments being built,” Marc Heller, partner at law firm Akerman, tells GlobeSt.com. “A lot of the marketplace is focused on the higher-end rental market.”
Due to the lack of market-rate housing to accommodate the middle-class incomes in the 70,000 to 75,000 range, this section is being squeezed by the affordability crisis, according to Heller. Many are struggling with the costs of housing and utilities and with their overall income, he added.
To alleviate the affordability crisis, Heller said some of his clients are acquiring older stock usually built in the early 2000s, or maybe 25 years old and upgrading the building units to accommodate that slice of the market and capitalize on demand. “It’s cheaper than building new stock. You can buy a property with good bones, pretty it up and increase rents over time,” he said.
As the gap between higher-end apartments and value-add apartments grows, Akerman clients see a real opportunity to take apartments and turn them into affordable homes for low-income to middle-income rents, driven in part by the new construction of luxury apartments that have saturated the market, according to Heller.
According to a recent GlobeSt.com article, the reason workforce housing is well-positioned, even better than class-A apartments, is because in a downturn, most workforce housing renters will stay put, and many renters in the luxury segment will bump down to workforce housing.
“The sector revolves around people that are trying to find product to meet their needs, and that is going to continue even in a down market. In the highly amenitized space, there is going to be a supply-demand issue in a down cycle,” Pat Jackson, founder and CEO of Sabal Capital, tells GlobeSt.com. “Right now, vacancy in that market is already higher than workforce housing. To the extent that demand decreases, it will put more pressure on the upper segment. That isn’t to say that there will be defaults, but you will have declining investor returns.”