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.
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.
Yes, SF is a perfect example where demand so wildly outstrips supply that the dominating driver of cost is space. Whether it is nice space or a total dump is only a small percentage of what dictates the over all price.
Look at it this way, say a small apartment has 12 Square feet of counter space in the kitchen laminate counters cost $25 per square foot and granite costs $50. the relative cost difference between luxury and cheapo now is almost nothing once amortized and compared to the total rent.
This is a really interesting theory. Initially I read this and nodded in agreement. But now I question, if demand in SF is truly so high, wouldn't those renting out nicer places be able to charge more? An increase in overall demand means some portion of that is an increase in demand for "luxury" housing, so wouldn't the rent for those units rise accordingly?
Nicer places can charge more. It's just what when push comes to shove people aren't going to move 5 hours away for nice finishes. They will how ever put up with cheap counter tops if it means being 1 block from the metro. The over riding factor as other have pointed out is space and location. everything else doesn't really move the needle when you are looking at markets with very high prices.
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.
land is generally 90%+ of the value out here in santa monica. 1 story tear downs go for $2M in the area i live. the new owners usually want to build their own thing - a big spanish style ranch or weird japanese/modernist house - it's the land that's valuable and scarce, not the access to construction crews and building materials
Curious about which is next door to the modern home - is it a modern home with a pool, next to a 1950s home? Or is it a modern home next door to a house with a pool, in a different neighborhood than the 1950s house?
In the past, I've heard that a house's value can maximize at 140% of the value of its neighbors, so a 1950s house in the same neighborhood as the modern house might drag down the modern house's value.
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.
The "difference in utility" between those two units is actually not huge, that's why the prices are similar. Your two homes are comparable on location and size which are the largest components of utility.
The housing with low utility is in Bumfuck, IL where there haven't been any jobs for 40 years.
"'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.
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.
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.
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.
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.
As I mentioned in another comment here: "luxury" gets you around rent control in at least one major US city, so I imagine there are developers out there doing the absolute minimum to meet "luxury" standards.
It's a perverse incentive: they make it nicer to avoid regulations, not to actually attract luxury-minded tenants.
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?
Its not that pressure is bad, but bottom up would be better than top down. The rich top already have pleny of disposable income, it doesn’t change their lives all that much to get a bit more. More affordable housing in the bottom would mean a revolution to the people affected, they’d suddenly have money for education, travel, quality cars and luxeries. The rent is too damn high, and it doesn’t matter for the top but means the world to the bottom.
It could easily not drop prices in the bottom rungs. SO long as they are cheaper than the average price of apartments, they are still good to offer. They can get a little closer to average price and still be competitive.
It might not drop prices on the lower end but if these places didn't exist the people now houses in them would be displacing the people currently housed in more modest dwellings.
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...
> 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.
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.
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.
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.
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.
> 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.
>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.
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.
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.
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. »
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
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.
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...
