Luxury MF Builds Pressure Rents Overall

LOS ANGELES—As the trend toward luxury development in multifamily has spread outward from the Texas cities where it began some 10 or 12 years ago, the rate of upward pressure on rents has varied from market to market, and building to building. For investors who know when and where to go in, the rent growth offers opportunities, CBRE Group says in a new report.

About 80% of the 179,000 apartments that were delivered to 62 US markets in 2014 carried rents in the top 20% of their respective markets, CBRE says. This is part of a shift that has taken place since 2006: over time, those cities that had relatively high new construction premiums nine years ago no longer have them today, while relative latecomers to the luxury development trend continue to command those premiums.

In markets where new construction premiums experience strong growth, a peak is likely to occur, says CBRE. Once that peak is reached, the average rent for existing apartments begins to grow relatively quickly. At the same time, luxury buildings that were built recently—but aren't considered new construction anymore—also contribute upward pressure to rents overall.

“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,” says Peter Donovan, senior managing director, multifamily, at CBRE. “These trends present opportunities for multifamily investors to time the cycle and achieve above-market performance.”??

In markets like Austin and Tampa, both of which have seen strong rental growth for new construction, “a peak is likely to occur,” Donovan adds. “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.”

For more insights on investment opportunities and multifamily development trends, be sure to attend this year's RealShare Apartments, scheduled for Oct. 21 and 22 at the Westin Bonaventure in Los Angeles. Click here for further information and to register for the conference.