Modest apartment complexes may cost relatively lower than luxury units. However, given the increasing demand and scarcity of these rental properties, the rental fees of mid tier apartments are rising higher and faster than luxury rental units.
The landlord for a Verona apartment complex in Denver has raised its rent up to 72 percent on some units in just two years, states the Wall Street Journal (WSJ). This is after renovations were made to the complex which had very minimal amenities. The 1980's era building that caters to middle class and working class families did not have concierge service, or a rooftop lounge and infinity pool. Despite its simplicity, the demand and rental fees has grown stronger in the recent years.
The WSJ report indicated that fewer developers are building midtier apartments nationwide. According to CoStar Group Inc., 80 percent of the new apartment complexes built in the country's major metropolitan areas are luxury properties. Older midtier apartments are either fully leased or already demolished. This resulted to a severe shortage of modest apartments which eventually pushed rental fees to rise higher than prime properties. Experts also stated that the construction cost of new apartment complexes are generally too high to justify building modest rental properties for low to middle income renters.
David Bragg, an analyst for Green Street Advisors, told WSJ that the average monthly rent to enable the landlord or apartment developer to gain back construction investment is projected at $2,900. Bragg used AvalonBay Communities Inc., one of the country's largest apartment developers, as an example wherein the developer spends on average $340,000 for each unit it builds. The resulting average monthly rent has pushed such projects near the top end of the expensive apartment markets.
Meanwhile, the overall demand for rental apartments remain strong, based on the latest National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions, reports Co-Star. The NMHC data showed that market tightness, sales volume and equity finance indexes remained near or above the break-even level of 50. The debt financing index also decreased to 35 from 65. This marked the first index decline below 50 since January 2014.
Mark Obrinsky, NMHC's senior vice president of research and chief economist, said that the debt financing decline is significant. Obrinsky explained that the decline reflected on two things: modest rise in interest rates and the tight policies enforced by Freddie Mac and Fannie Mae as they began to approach their lending volume caps. He added, "Regulator action to keep multifamily mortgage finance flowing has averted a crisis, but lending conditions remain somewhat tighter."
Despite the banks tightening loan standards, the NMHC survey showed that the demand for rental housing is stronger this year, said Obrinsky.
