It seems that the gap between affordable rental units and expensive luxury units is widening. However in contrast to conventional thought, luxury units are not seeing spikes in pricing. Instead, rents for units designed for middle income households are spiking, leaving many with few options for affordable housing. Developers have contributed a great deal to the issue, as they focus on building more luxury units rather than affordable ones. The Wall Street Journal has recently documented the phenomenon occurring in the country’s largest metropolitan centers, noting high construction costs, and growing populations.
According the CoStar Group Inc., more than 80% of new units available in metro areas are luxury rentals. Although the demand for middle-income rentals is seemingly at an all-time high, few of such rental units are actually being built. Nationwide, the scarcity of such units is driving prices up, leaving many with few options in terms of housing. Working-class households are either forced to pay higher rents, or driven into lower-income units and neighborhoods.
Despite the high demand, developers are refusing to build more units that cater to middle-income individuals. For developers, construction costs do not justify building lower-tier housing. Class B and C apartments, which are designed for middle-income and working class owners have become more expensive to build. Because of high construction costs, Class B apartments especially have outpaced rent increases compared to luxury Class A apartments. Axiometrics Inc., a Dallas-based apartment research firm, reports that rents for Class B apartments have jumped 5.8 percent in the second quarter of 2015. These rental units are often low-rise suburban apartments with outdoor pools, business centers, and ample green space.
According to New York University’s Furman Center and Capital One Financial Corp, fewer affordable units are available to middle-income earners. In Miami for example, renters looking for affordable rents can only afford 33 percent of available units in 2015, which is down seven percentage points from 2006. Philadelphia’s case has seen an even greater drop of 10 percentage points from 45 percent to 35 percent since 2006. Amazingly though, luxury units are still drastically more expensive than Class B or C rentals. Rental units for Class A luxury apartments average $1700 per month, while Class B rents average $1200, and Class C units average $850 per month.
In the article, The Wall Street Journal uses the Verona Complex in suburban Denver to showcase this phenomenon. Philadelphia-based Resource Real Estate which owns the complex has poured $3–4 million in upgrades into the mid-tier housing units. Since renovations began, tours and open houses have risen 25 percent. In order to keep up with high demand, the firm has teams working double shifts to finish all units for new renters. Rising prices are burdening many renters though, as more and more households are classified as “rent burdened”. Rent-burdened households mean that more than 30 percent of their incomes are spent on housing.