The Two-by-Four Doesn’t Care Whether It’s In a Luxury Building or an Affordable Building
Last year was terrific for the apartment industry, at least for developers and owners of luxury apartment buildings. Beginning in 2012, slightly more than one-half of apartments have been built for the luxury renter. In succeeding years, those numbers climbed to 60 and 70 percent. In 2018, when that number exploded to 87 percent – that’s right: nearly 90 percent of apartments built last year were targeted to the upscale market – the luxury market seems to be unstoppable. So, what’s the problem?
Toby Bozzuto knows what the problem is. It’s the cost of building materials. The cost is the same for concrete, bathtubs, iron and steel, curtain rods, and yes, two-by-fours. The fact is, though, that materials become comparatively less expensive when they’re used in a $250,000 condominium instead of a $2.50/square foot affordable housing unit.
Construction costs are not the only deterrent to affordable apartment development. Land and labor costs have spiked as well. As a result, most developers can’t afford to add anything to the rental housing stock other than luxury units. Investors are now abandoning new construction in favor of rehabbing older apartment stock. These value-add projects increase rents for current middle- and low- income renters.
For Bozzuto, whose development, construction, and management portfolio comprises 70,000 primarily luxury units, the consequence of this cost differential means that, in his words, “There is an acute crisis headed our way.” The crisis? Renters of luxury apartments spend a relatively low amount of their income on rent, despite rents being obviously high.
“That being said,” he concludes, “it is a tale of two cities. In the middle income and the lower income markets, people are spending proportionally more on their rent. So, the issue is (that), for us to develop an economically viable, feasible project, it has to be, by its very nature, high end. The rents have to be high to support the (construction) cost.” Put another way, the price for the lowly two-by-four is the same for all builders, but its cost is significantly different, depending upon how it’s used.
In a late 2017 study, the Harvard Joint Center for Housing Studies reported that, despite rising incomes, nearly one-half – actually 47 percent – of the 21 million renter households were paying more than 30 percent of their income for housing, a number that includes 11 million households paying more than 50 percent of their income for shelter. As a principal of the Harvard project summarizes the problem, “The market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle-and working-class renters, let alone those with very low incomes.” This, indeed, is the “acute crisis” that Mr. Bozzuto identifies; unfortunately, rather than something “headed our way,” the crisis is already occurring, with no evidence that it will disappear soon.
Here’s the bottom line: multifamily construction is now at a 40-year high, with apartment completions in the 150 largest U.S cities exploding to nearly 400,000 units in 2017, outstripping the previous year’s production by nearly 50 percent and more than doubling the long-term average increase.
Toby Bozzuto may sincerely believe that there’s an acute crisis in our housing future, theorizing that the luxury market is, in his words, “on the precipice of oversupply” because of the rising land costs, labor costs, and others. Perhaps he’s right. However, high-end apartment construction suggests future explosive increases, while the prospects for affordable housing, currently gloomy, likely will continue to stagnate.