Premiums on Luxury Apartments Create Investment Opportunity, Says CBRE Economist

A new research report written by Matthew Vance, an economist with CBRE, indicates the trend toward developing luxury apartment buildings is not new, but has become more widespread in recent years.

“It is drawing greater attention as a rising trend in most major markets,” writes Vance. “The continued delivery of high-end rental housing — along with a lack of new moderately priced apartments — is likely contributing to strong overall rent growth that is leaving the budgets of many middle-class renters tighter than ever.”

Vance sifted through data and met with experts in the multifamily sector to uncover the following trends:

  • The luxury development trend began in Texas in the mid-2000s and has since spread to most major markets around the country.
  • An analysis of several markets, such as Austin, Los Angeles, Tampa, Raleigh, Boston and Washington D.C. — shows that rent premiums for new apartment buildings vary in their behavior across markets and over time.
  • In many other markets, new construction premiums have increased as the trend toward luxury has accelerated.
  • The trends create opportunities for investors to target timely equity allocations based on factors such as property characteristics and hold periods.



Click to enlarge

According to Vance, developers discovered an opportunity in the south Texas residential real estate market for luxury apartments in the early to mid-2000s.

By 2007, new apartment buildings in several Texas markets were leasing at rates more than 40 percent higher than the market average. That trend continues across the country today.

“Of the 179,000 units completed across 62 U.S. markets in 2014, 80 percent carry rents in the top 20 percent of their respective markets,” writes Vance. “Rent premiums on new construction in Tampa and Los Angeles, for example, are now reaching 40 percent.”

For investors, the report holds that in markets where new construction premiums experience strong growth, a peak is likely to occur. After that peak is reached, two factors can combine to lower construction premiums. The first is that luxury buildings that were built recently but are no longer considered new will place upward pressure on the overall average market rent. The second is that the average rent for existing apartments will begin to grow as a result.

“The age of a building will factor differently into its rent growth rate and potential for above-market performance depending on how far along its market is in adapting to the trend toward luxury,” Vance explains. “In less-established rental markets where construction premiums have not experienced an upward trend, there are opportunities for high-end apartment development.

Click here to read the full report.

— Haisten Willis

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