Overbuilding Fancy Resi Rentals, But They’re Not (Fancy)

  • “Fancy” Is A Softer Way To Say “Luxury” Even Though They’re Not
  • Land Costs Are Forcing Developers To Charge Higher Rents, So Deals “Pencil In”
  • Manhattan Rents Are Rising Again As Mortgage Rates Increase

Two words have crept into the housing economy narrative: “Fancy” and “Resi,” which startles me every time I come across them. “Fancy” is another way to say “luxury,” and “Resi” seems to have British origins in terms of a nickname for “residential.” Now that I’ve gotten that off my chest, today I’m exploring the phenomenon of what multi-family types get built today versus what the consumers really want. As it turns out, our language isn’t entirely clear.

Jay Parsons is a rental housing economist must-follow on “X.” He got my attention with a post about “fancy apartments,” which is another way of saying “luxury apartments,” which is another way of saying “higher-end” apartments.

The driver of these apartments is that land costs are elevated. To build multi-family today, along with higher material and labor costs, the rents skew higher than demand, well, demands. He’s breaking down the “Fancy” Wall Street Journal article (gift link). Wow. I love the explanation he provides below:

Click on image for full thread

It’s really worth reading the Jay Parsons thread covering “Fancy.”

The cost of land is driving the new multi-family rents higher, and developers have to include shiny, not necessarily “luxury” amenities to sell the higher rents to consumers. As a result, U.S. rents on a same-unit basis are slipping, but the prices are rising due to the shift to the more expensive product mix.

The criticism that Jay makes of this Wall Street Journal article The U.S. Has More Fancy Apartments Than It Is Able to Fill (gift link) about building multi-family rentals that don’t match demand is a narrative I have trodden on many times. “We’re building luxury rentals when the market is demanding more affordable products.” The reality is that many of the “fancy” apartments we are building really aren’t luxury, but they wouldn’t be built if the rents were any lower. Such a development wouldn’t pencil out, so the developer is forced to add “shiny” stuff to try to push rents higher so the project is economically viable. Also, institutional investors prefer “luxury apartments” to “affordable apartments.” Renters of higher priced apartments tend to have less rent delinquencies than affordable apartments. That’s kind of crazy to think about.

While newly constructed rental apartments with basic amenities similar to those of nearby existing rentals are expected to cost more in the market, the spread is probably more expansive than it deserves. And that’s due to the high cost of land.

New York City Rents Are Rising Again

In contrast to the national pattern, Manhattan rents have been rising for the past three months (year over year) at a rising rate. In fact, there is a 19.1% share of bidding wars in Manhattan, which is defined by the rent that goes for more than the landlord is asking.

Source: Elliman Report: Manhattan, Brooklyn & Queens Rentals

Manhattan rents are climbing again.

Luxury rents have gone through a weak period as luxury sales have been strong.

The pattern of rents over the past five years looks like the Rocky Mountain Way.

Monday Mailboxes, Etc. – Sharing reader feedback on Housing Notes.

January 10, 2025: LA: Both Ends Burning

  • Will people rebuild? The real question is how fast LA County building department work can issue permits. There are still properties trying to rebuild from the Woolsey fire and that was Nov 2018. Plus, what builders are able along with their crews get the permits, materials and labor to rebuild. This will be an ongoing saga for probably 10 more years. Just some rough math.If all the homes destroyed averaged $3,000,000 in value, x 10,000 units is $30,000,000,000. $30B for just global value loss. That doesn’t include infrastructure and landscaping.  If you add in the business and their economic losses, this is probably a $60B to $100B loss. Not sure my math is right as my HP 10c can’t count that high…….LA is not equipped to handle this rebuild. Second LA as you can see from the news is running as fast as it can to blame everyone else. The real question is, will Mayor Bass head to the Swiss Alps for skiing or will she head to Hawaii in April or May to catch some rays not impacted by the smoke. This is a mess. 
  •  And because of the water loss by DWP the plaintiff attorneys will be lining em up and their cost to the settlement is 28 to 32%.  The global settlement cost analysis usually takes all in account.

Did you miss the previous Housing Notes?

January 10, 2025

LA: Both Ends Burning

Image: Grok

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