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May 2017 — Multifamily Properties Quarterly — Page 31
some valuable insight into who’s
renting these high-end residences.
While a definitive conclusion is
impossible, our analysis suggests that
there are still many households –
even many apartment renters – with
sufficient income to rent new Class
A apartments. Potential pullback in
demand for these higher-end units
in the future is more likely to reflect
changes in resident preferences than
affordability, with some residents per-
haps choosing to spend less on their
housing or opting for different types
of housing altogether.
• Many upscale renters downsize
from single-family homes. Identify-
ing “luxury” apartments using public
micro datasets turns out to be chal-
lenging because they lack class rat-
ings (A, B, C, etc.) since there is no
uniform agreement on how to define
these class ratings. We could theoreti-
cally use the apartment characteris-
tics that these data sources provide to
try to create our own ranking system.
But the data sets are missing one
critical piece of information – namely,
exact location.
Instead, we looked at apartments
where the rent is at or above the 90th
percentile of all apartment rents in
the same metro area, which we’ll call
upscale apartments. While an imper-
fect measure – what qualifies as luxu-
rious or upscale differs across diverse
metro areas – it is, nonetheless, a use-
ful proxy in gaining perspective on
the high end of the market.
One of the first things the analysis
showed is that there are some notice-
able differences in who moves into
upscale apartments. Data from the
American Housing Survey on recent
movers (those who moved within the
past two years) showed that a slim
majority – 51 percent – comes from
other apartments. However, another
30 percent of upscale renters come
from single-family, owner-occupied
homes and 15 percent from single-
family rentals.
In other words, 45 percent of those
who moved into upscale apartments
in the last year came from single-
family houses. This is only a little
higher than the 41 percent share in
1999-2001, suggesting this trend is
not a temporary bump caused by the
bursting of the housing bubble.
Clearly, existing apartment renters
are not the sole source of demand for
upscale apartments. The fact that just
under a third of upscale apartment
renters had previously been single-
family owners/occupiers is note-
worthy, particularly considering that
single-family owners tend to move
far less often than renters.
Recent movers to upscale apart-
ments also are considerably less like-
ly to live by themselves – just 31 per-
cent of movers to upscale apartments
are single-person households versus
43 percent of movers to other apart-
ments. They are much more likely to
have roommates (15 percent) than
other recent movers (9 percent), and
are a little more likely to be married.
These differences make sense.
Roommates and married couples
tend to have more income than
single-person households, making
such households more likely to be
able to afford upscale apartment
rents. In contrast, single parents are
likely to have higher expenses rela-
tive to income than other households,
so they may be less able to afford
upscale apartments.
• Many renters can afford expensive
apartments. Among apartment renters,
the pool of potential upscale renters
is substantially larger than the num-
ber currently living in upscale apart-
ments, at least using the standard
affordability metric that says housing
costs should be no more than 30 per-
cent of income.
In fact, in the top 45 metros, there
are 1.5 million apartment households
that could afford to pay the 90th per-
centile rent but instead pay rent rates
between the median and the 90th per-
centile. This is especially true in New
York and Los Angeles, where there are
the most apartment households that
could afford the 90th percentile rent
but currently pay less.
Locally, in the Denver-Aurora-Lake-
wood metropolitan statistical area,
there are 31,021 apartment renters
who can afford rents at the 90th per-
centile but are renting between the
50th and 89th percentile, according to
NMHC tabulations of 2014 five-year
American Community Survey micro-
data. The rent used to represent the
90th percentile in Denver was $1,464.
The top 10 metro areas with renters
who could afford to pay at the 90th
percentile or more is noted on the
table. Denver is No. 15 on the list of
the 45 MSAs analyzed.
Most of the metro areas on the top
10 list also have seen considerable
apartment development in recent
years. This suggests that resident
incomes might not be as large a gov-
ernor on potential new development
as some have suggested.
That said, the high cost of new
development in many of these metros
means that rents on new apartments
may exceed, perhaps by a lot, the 90th
percentile rents on the existing stock.
In addition, many residents may be
happy paying a good deal less than 30
percent of their incomes for rent, even
if it means fewer amenities or inferior
location.
• The more educated, the more likely
to live in upscale apartments. We also
analyzed the key economic, social and
demographic variables available from
the American Community Survey to
identify any additional distinguish-
ing characteristics of upscale renters.
Only one stood out: education.
Among those who can afford 90th
percentile rents, both nationally and
locally, there is a strong relation-
ship between the number of years of
education and the rent they pay; the
more schooling, the more likely they
are to pay upscale apartment rents.
For example, among those who can
afford 90th percentile rents in Denver
and are living in upscale apartments,
45 percent have four years of college
under their belts; another 26 percent
have five or more years of college. By
contrast, among those living in apart-
ments with rents in the 50th to 74th
percentile range, 33 percent have four
years of college education, while 16
percent have five or more years.
It is unclear why greater education
leads to a greater likelihood of living
in an upscale apartment, even after
taking into account income. There are
likely other characteristics of an indi-
vidual or household that play a factor.
But it does suggest one additional
element to look for when trying to
estimate the size of potential upscale
apartment demand.
Coming back to the question of
whether the industry is in danger of
overbuilding the high end of the mar-
ket, our analysis suggests that, from
a macro-market perspective, there is
still a substantial reservoir of house-
holds who could afford upscale apart-
ments.
The data shows that many high-
end renters are essentially lifestyle
renters or renters by choice. Many are
highly educated and are married or
living with roommates, making them
more willing and able to pay higher
rents for upscale apartments. More-
over, a good portion of them have
had a single-family living experience,
either as an owner or renter, prior to
living in an upscale apartment. For
whatever reason, an upscale apart-
ment now makes more sense for
their current needs.
But arguably more important is the
fact that there appears to be more
depth to this market, as there are
many apartment residents who could
afford to pay upscale apartment rents
but spend less. So the question is less
about whether they can afford it and
more about whether they see enough
value in upscale apartment living to
pay the higher rents.s
Market Update
National Multifamily Housing Council
National Multifamily Housing Council
National Multifamily Housing Council
Renters who could afford to pay higher rents, but choose to pay less – based on the affordability
metric that housing costs should be no more than 30 percent of a household’s income