
“High End” Apartment Construction Creates Mismatch of Supply and Demand - 80mph
https://wolfstreet.com/2018/10/03/high-end-apartment-construction-by-city-2018-mismatch-supply-and-demand/
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pmorici
I see people complain about this a lot on Reddit. I personally take the view
alluded to in the article that all supply is good supply in that it will drive
down average rent in the long term. Calling something 'luxury' is primarily a
marketing gimmick. No one wants to live in a complex advertised as
"respectable housing for the indigent". A better way to look at these
developments might be what their average square footage per intended occupant
is. So long as these apartments aren't all pent house sized then they can
always lower rents and still make the numbers work.

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stephengillie
I used to live in what could be called _" respectable housing for the
indigent"_ \- studio apartments in a 1920s building, with radiator heat,
college fridge, and only 40A of electricity per unit. I stayed there while
getting back on my feet after a failed robotics startup in 2012.

Currently, I live in a luxury apartment about 4 blocks away. A 2013 building,
it has AC and gigabit internet, and free wifi on the roof deck

The housing problem is that - while the difference in utility between these
units is huge, the rental price difference is just a few hundred per month.
Granted that they are the same square footage. "The indigent" cannot afford
base-level housing.

~~~
village-idiot
In my area (socal) the gap between really nice housing and garbage is
shockingly small.

Not a rental unit, but the gap between a crappy house (unmaintained 1950s with
a staircase in the bathroom) and an ultra modern home with a pool _next door_
was only 20% or so. I view this as a sign that the market is way off its mark.

~~~
treis
>staircase in the bathroom

Wow how does that happen?

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stephengillie
Remove a wall that separates them. In college, I rented in a house with a
toilet in the hallway. Because the landlord took the bathroom door away, and
cut a hole in the wall to the other bedroom, so the bathroom became a hallway.

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m-i-l
_" 'High end' here means 'luxurious' – a marketing position for a building."_

In London it has long been a joke that all new builds are branded "luxury
apartments" as a matter of course, even if they are really low specification,
i.e. the term "luxury" has become both obligatory and in the process
meaningless.

~~~
tunap
In the US they are called "luxury rentals", so the marketeers aren't
constrained to marketing merely apartments. They can be called condos or
townhomes... or whatever else their imaginations can come up with. The reality
is: stacked boxes with paper thin walls and minimal property outside the box.

~~~
k_sh
Not sure about other cities, but in Los Angeles a "luxury housing unit" can be
exempted from rent control (there's an application process) if it would
otherwise be subject to it.

I imagine that a lot of the dilution has come from (re)developers labeling
units as luxury and doing the bare minimum to qualify, specifically to avoid
rent control.

~~~
tunap
Blackstone is spending millions to retain such exemptions trying to block Prop
10 as we type

No safeguards like those in Phoenix, it's still the wild, wild west of
politics & regs here.

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moltar
It is illusionary high end.

Go take a tour of some of these and look at everything with a critical eye.
You’ll notice that workmanship is usually very poor, fixtures are of cheap
Chinese quality, faux materials everywhere.

I think the industry just learned how to make high-end-looking very well.

In reality many of these luxury buildings have quality problems to come years
after delivery. And good luck getting the builder to fix it. They conveniently
“go out of business” or just drag on forever with promises and even court
battles.

~~~
village-idiot
Having lived in a few of these “luxury” places, I have a theory.

They build the structure of these buildings very solid, but the fixtures
purposefully cheap. Once styles change they can gut renovate them for very
cheap and maintain their stylish image (and rents). I think a very well made
but out of style apartment would be more expensive to make and lose rents more
rapidly.

~~~
eigenstuff
I can't help but sit here and think "so it's like the Forever 21 of
apartments," ha

What's wrong with timeless instead of trendy?! (Rhetorical question)

~~~
treis
There's no such thing as timeless.

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jazzyk
Ever been to Rome or Florence?

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acconrad
Boston is terrible at this. It seems like it's the only thing they're building
right now in the city's most popular neighborhoods (South End, South Boston,
Seaport). All the other neighborhoods are just renos, renos, renos.

And yet occupancy rates are at around 50%, a good portion of the ones that are
taken up are from foreign investors paying all cash, and like someone else
mentioned, the workmanship is mediocre at best (I saw one go up literally
right next to my house from the studs).

I just can't see why it's either luxury or low-income housing. The margins
can't be that good if you have huge occupancy rates, and it's certainly
subsidized if you're building for low-income housing...isn't there a better
way in the middle?

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icebraining
_In other words, it creates downward pressure on rents, from the top down._

Well... good? Seems like the system is working. More supply = lower prices
across the board, even if the supply is not exactly what was "needed".

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LimpManifest
Isn’t that counter to the Liberal claim...that we need more low-income housing
vs high-end apartment?

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dukoid
The liberal claim is that we need to fix zoning that makes supply expensive
instead of goodwill regulations that can't work long term because they don't
address the fundamental root supply problem.

If developers build expensive housing beyond demand they can't fill as
intended, driving prices down, why should this not be better than nothing?
Even if it's less lucrative for them than expected, it should be net positive
for renters...

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saosebastiao
> The solution is the market. These units will have to be rented out, either
> by the developer or by the creditors that will end up with the project if it
> fails. The way to fill these units is to cut rents until sufficient demand
> materializes. And this puts pressure on rents in lesser buildings that have
> to compete with these high-end units. In other words, it creates downward
> pressure on rents, from the top down.

Well said. Developers build high end because margins are high and vacancies
are low and regulation won't allow enough competition to actually threaten
their position in the market. In any scenario where you're limited by how much
you can build, you're going to build your highest margin prospects first.

Developers can build high end all they want, but they have to lease them up or
they can't pay off their loans or sell their property. Let them build more and
when the luxury market saturates, more affordable buildings will start to look
like the best prospect for development.

Unfortunately the fact that developers build luxury buildings is reason enough
for some people to not let them build at all.

~~~
tobylane
What about London, where there's competition but they're all selling abroad so
that a tower can be fully sold but still vacant? That is the cause for British
dislike towards the developers.

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Symmetry
Back during the Reagan years when the US restricted Japanese car manufacturers
to only shipping a certain number of cars per year to the US Toyota responded
by no longer selling Camrys and introducing the high end Lexus brand.

~~~
whyenot
Lexus launched in 1989, a year after Reagan left office. The line was
developed in response to voluntary export restraints initiated by the Japanese
government, not US restrictions.

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ghobs91
What'll end up happening is that when they run out of wealthier clientele to
buy/rent those, those apartments will sit vacant and they'll have to lower
prices, thereby opening them up to the middle class.

Companies will always chase the higher margin luxury market first before
hitting the mid range and budget audience.

~~~
JumpCrisscross
> _those apartments will sit vacant and they 're have to lower prices_

When leverage is involved there is a lag. (If your building requires X per
square foot to pay the debt, you may hold out longer for someone who will pay
X versus renting for 0.9X.) But that is temporary.

The luxury housing boom is doing that to New York. I just negotiated my rent
down by comparing the recently-discounted rent at the luxury building down the
street to ours, counting up the amenities, and making my case for moving to
the landlord. Not wanting to lose a good tenant in November, they acceded.

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treis
I think this is just a definition issue:

>Discretionary

>Renters by choice. Attracted to the extreme upper end of the apartment
market; properties generally of resort quality, clearly appealing to
households capable of owning a residence, but choosing to rent, or households
with substantial incomes, but without wealth. The luxury rental category
primarily focuses on empty nester households, or more particularly, high net
worth households. The renter-by-choice household is demanding; finishing
detail and amenities included in properties appealing to this category must be
of exceptional quality.

>A+ / A

>High Mid-Range

>"Lifestyle renters." The high mid-range category appeals to double-income-no-
kids ("DINK") households holding income status similar to that typically
required of discretionary property positioning, but not in possession of the
wealth more probably associated with the renter-by-choice rental household
category. Properties holding high mid-range status typically offer excellent
finishing quality, and attractive common area facilities, and typically focus
on an environment providing a more social experience.

>A- / B+

>Low Mid-Range

>Working professionals. The low mid-range household is typically composed of
working professional, “gray collar” households (i.e. policemen, firemen,
teachers, technical workers). These households, while renters-of-necessity,
are inclined to apply some discretion regarding rental environment quality,
and will opt for “adequate” quality of improvements offering reasonably
attractive amenities in a good/convenient location.

[https://www.yardimatrix.com/About-Us/Our-Methods/How-We-
Defi...](https://www.yardimatrix.com/About-Us/Our-Methods/How-We-Define-The-
Apartment-Rental-Market)

They count anything in the high mid-range or above as "luxury" when clearly
it's not. Anything below Low Mid-Range has "older" as part of it's
description, so obviously no new construction will be placed there.

In my market the new apartment complexes are almost exclusively 2 bedrooms or
less. They are very clearly for those with disposable income and no kids.
Those that don't fit into that category move a little bit out and rent
townhomes/single family homes.

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jaclaz
In a completely different housing market (Italy) a lot of the hype is -
besides "luxury" \- on energy efficient/energy saving housing.

But the reasons (from the constructor/realtor viewpoint) are easy to
understand, once the "basic" building costs are considered (and they are not-
so-different between a "poor" home and a "luxury" one) the rest is
"accessories", and there is a larger margin on these than on the "basic"
construction, in the sense that the increase in the selling price as a
"luxury" home is much larger than the added cost for these accessories, and
this without considering the "fake only luxury" cheap ones sometimes used.

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thomasfl
If the rich prefers urban living, then it’s only a matter if tume before they
start constructing new urban cities from scratch. They’ve done it for some
time in china, wherw they made replicas of Paris (with an eiffel tower) and an
austrian village.

«Clearly, there is a trend among some high-income and high-wealth people to
avoid the suburbs and go instead for convenience, views, short commutes to
work, etc. »

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puranjay
This seems to be a global epidemic.

Back in my hometown in India, where average 3 bedroom rental properties go for
under $300/month, builders are making luxurious homes that cost $300,000+

They've been on the market for nearly 4-5 years. No one is biting because no
one has that kind of cash. Yet, the market doesn't seem to relent

~~~
pnutjam
Ignoring white collar crime is a driving force for this stuff in the US.

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k_sh
Sounds like this luxury building trend might, on the whole, be good for
renters.

~~~
jdck1326
... but not gooderer than if the time spent on luxury housing was spent on
affordable housing instead

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Novashi
I'm inclined to believe a lot of this is for money laundering or parking cash
in other countries as a store of value (and I'm admittedly biased after the
NYT article about Trump's work). Maybe even buying a place for a rich
son/daughter to go to university or just experience US culture, or escape
danger in their home country.

Local governments have a interest to not crack down on this in the form of
taxes and fees associated with their real estate laws.

~~~
UncleEntity
Probably not, more like a continuation of the last real estate boom where the
new money (from zero or negative interest rates) is going into multi-family
mega-complexes instead of McMansions this time.

Where I live (downtown Phoenix) every single vacant lot and quite a few
"marginal" businesses the developers could get their hands on have been turned
into massive luxury condo/apartment complexes. So much so the city is telling
my landlord he isn't charging "market rates" and needs to increase the rent,
and taxes he pays, due to all the high-rent places that went up in the last
couple years -- luckily he doesn't agree so...

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rdlecler1
This is only a problem is your using it to attract absentee buyers who are
harming it as a store of value.

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dang
Url changed from [https://www.nakedcapitalism.com/2018/10/high-end-
apartment-c...](https://www.nakedcapitalism.com/2018/10/high-end-apartment-
construction-totally-dominates-creates-mismatch-supply-demand.html), which
points to this.

