Do New Luxury Apartments Bring Lower Rents for All?

new “luxury apartments” influence rental costs for all prices of apartments, including the lower-cost Class C apartments NMHC says

In a new research bulletin, the National Multifamily Housing Council (NMHC) says new “luxury apartments” influence rental costs for all prices of apartments, including the lower-cost Class C apartments.

But many Americans remain skeptical as to whether these new apartments – which tend to be more expensive than existing units and are often marketed as “luxury” – will aid affordability for households at the lower end of the income spectrum, says Chris Bruen, senior director of research for the NMHC.

Apartments classified as Class A tend to be both higher quality and more expensive than their Class B and Class C counterparts.

Class A apartments recorded an effective asking rent of $2,213 per month in the first quarter of 2024, according to data from CoStar.  Class B apartments rented for $1,671 and Class C apartments for $1,347.

“Even though nearly all apartment units built in 2023 were classified by CoStar as either Class A (41.3%) or Class B (56.8%), both economic theory and empirical literature suggest that this new supply should have a downward effect on rent growth for all apartments, including Class C. For instance, Myers and Park (2020) found that new apartment construction, even at higher price points, enabled older units to “filter” and house an increasing share of low-income households over time,” Bruen says.

He says there is evidence that this recent wave of Class A and B construction has led to lower rent increases among Class C units. Markets with higher rates of Class A and B deliveries tended to record lower rent increases among Class C units, providing some evidence that construction at the high end promotes affordability among all unit types.

The Takeaway

Apartment deliveries have increased to their highest level since the late 1980s, which has resulted in a significant moderation in rent growth. According to the NMHC analysis, this surge in construction – which consists almost entirely of more expensive, Class A and B units – translated to lower rates of rent increases for Class C apartment units as well, providing further evidence of apartment “filtering.”

The bottom line, according to these figures: Increased supply (of all kinds) equals improved affordability.

However, this higher level of deliveries and moderating rent growth is likely to be short-lived, since a combination of moderating rent growth, rising operating costs and a rising cost of capital have already led to a sharp pull back in new apartment construction.

Read the full report and detail here.

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