Strong renter demand for affordable apartments in affluent suburbs easily outstrips the available inventory of such properties. This supply and demand imbalance creates a big gap in the market that renovated older buildings can fill. These undervalued multifamily buildings also provide a healthy investment opportunity. Cranes dot the skylines of many American cities today, and much of the development is new luxury multifamily communities. For the last 10 years, the majority of the new apartments built have been high-end apartments, often in downtown areas. Underlying reasons Two main factors are driving developers’ preference for luxury urban apartments. First, developers are turning to urban areas because many suburbs are using zoning density restrictions to prevent multifamily construction. Developers may want to build in the suburbs, but suburban communities want to maintain the relatively small class sizes in their schools and the low crime rates associated with low-density areas, so they are not granting permits for new construction. Cities, on the other hand, are eager to welcome new residents to grow their tax bases, so they’re quick to provide permits for new multifamily construction. The second factor is rising construction costs. Excluding land costs, construction costs have risen 23 percent since 2010, …
