Luxury Apartment Developers Brace for Losses
A Combination of Stagnant Rent Growth and Excess Supply Spell Trouble for the Class A Apartment Sector
Summary
Luxury Class A Apartment Developers and Owners Struggle With Oversupply and Slow Rent Growth
In Addition To the Existing Inventory That’s Struggled To Wrangle In Demand, There Were Roughly 700,000 New Class A Apartment Units Under Construction As of Q3 ‘23
According To CoStar, Landlords Have Been Forced To Discount More Than 30% of All Listings
Rent Growth Across the Class A Sector Has Largely Slowed, With Major Metro Markets Such As Downtown Miami and Charlotte’s South End Getting Hit the Hardest
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As of Q3 of this year, there were roughly 1 million apartment units under construction, and 70% of which are deemed ‘High-End Luxury’.
While the U.S. is in desperate need of additional housing stock, the oversupply of Class A inventory positions the sector for an uphill battle entering the new year.
The biggest challenges will be mitigating concession offerings and absorbing tenants from Class B buildings that are slightly more affordable.
Landlords largely depend on concessions and move-in specials to drive leasing efforts. According to CoStar, Landlords are already offering discounts across 30% of all listings. However, the average marketed Class A apartment rent is still $2,074 per month; $550 higher than all other alternatives. This forces owners to either extend further concessions, or face higher vacancy rates; both are unsustainable.
Additionally, rent growth has come to a screeching halt. A handful of major metros such as Downtown Miami and Charlotte’s South End have even experienced a decline in rent rates across the Class A sector.
The excess supply of new construction that’s still in the pipeline, and the wide delta between Luxury Class A apartment rents and Non-Luxury Class B apartment rents, have set the stage for heavy turbulence entering the new year.
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