Luxury Housing Surplus Cuts Rent for Rich While Rising for the Rest

The U.S. rental market is exhibiting a striking split: luxury rentals are seeing price drops, while the average renter faces escalating costs.

Luxury market downturn: In high-end real estate markets like Austin and Chicago, luxury apartments and upscale homes are experiencing significant price reductions. This is due to a glut in construction, leading to an oversupply. For instance, high-end homes in Austin that once rented for $5,000 to $8,000 a month are now available at up to 20% off. The overall U.S. rent growth was just 0.3% in 2023, the slowest since 2010, indicating a broader trend of stagnation at the top end of the market.

Middle-market rent growth: Contrastingly, the middle and lower segments of the rental market have not seen such relief. Rent for these tiers increased by about 2% nationally in December compared to the previous year. This is a slowdown from the double-digit hikes during the pandemic, but still places rents roughly 20% higher than in 2020.

Zoom in: The disparity is evident across various U.S. regions. In cities like Kansas City, Indianapolis, Chicago, and Philadelphia, mid-market rents rose between 3% and 6% in December year-over-year, outpacing the growth in luxury segments.

Rising burden for renters: The share of American renters spending at least 30% of their income on rent has shot up over the past two decades and accounts for half of the renter population. Renters like Tamika Doolin near Kansas City have seen 5%+ rent increases each year. In cities like Providence, rents are up 6% YoY, making it increasingly difficult for renters to find affordable housing.

➥ THE TAKEAWAY

Tale of two renters: The surplus of new housing in the U.S. market has led to rent cuts at the top end, giving luxury renters something to smile about. Meanwhile, middle- and lower-tier apartments enjoyed rent growth. The rising costs of leasing middle- and lower-tier apartments, projected to grow 2% nationally this year, impact the majority of U.S. renters. This growing disparity underscores the need for more affordable housing options.

BlackRock Says to Invest In These Three Asset Types

The window of opportunity is opening up for real estate investors, says Blackrock in their latest 2024 Private Markets Outlook report.

Value in volatility: The global real estate market is resetting, with declining valuations creating opportunities for investors to acquire premium assets at attractive, often below-cost prices. This market shift, influenced by factors like inflation and rising interest rates, sets the stage for potentially lucrative investments, especially given real estate’s history of rebounding strongly after similar periods of dislocation.

The landscape: A major challenge in the market is the significant drop in transactions, largely attributed to the high cost of financing. BlackRock notes that restrictive financing conditions will likely persist, opening doors for non-bank lenders like insurance companies and debt funds.

Top picks for 2024: Blackrock says, “Income growth and yield will be more important for real estate investors in the dislocated market we see emerging. That places a premium on cashflow durability and rent pricing power.”

1. Apartments in key suburban locations: These offer promising growth opportunities due to favorable market dynamics.

2. Necessity retail close to metropolitan areas: This sector has attractive entry points and a low supply, making it a potentially lucrative investment.

3. Logistics hubs near major cities: The ongoing expansion of e-commerce and diversification of supply chains, including nearshoring and reshoring manufacturing, make these assets particularly attractive.

➥ THE TAKEAWAY

Finding pockets of promise: In the next few years, the real estate market is expected to see varied performances across sectors and locations, influenced significantly by interest rate changes since mid-2022. For investors, this means a strategic focus on selecting high-quality properties in prime locations, as these assets typically outperform others in the early stages of market recoveries.

In the week ending January 31, office attendance in 10 major U.S. cities surged to 53% of its pre-pandemic average, the highest rate since March 2020, according to Kastle Systems’ “Back to Work Barometer.” This figure surpasses the previous week’s peak of 51.8% and represents a significant rebound.

Kastle Systems utilized anonymized keycard entry data from client office buildings, noted that six cities exceeded the 50% mark, with Austin, Texas leading the nation at 65.5%, followed by Houston at 61.4%, and Dallas at 59.4%, continuing a trend of strong returns to office in TX in particular.