U.S. Rental Buildings Are Reaching Brave New Heights

With rising construction costs, developers are building taller rental properties with more units to maximize profitability.

Surge in supersized structures: Developers are capitalizing on a mix of relaxed zoning laws, institutional investments, and the appeal of urban living to construct mammoth apartment complexes. Since 2021, over 2,900 new buildings with more than 200 units have emerged, reflecting a 17% increase compared to the previous three-year span. This trend is not only reshaping skylines but also marks a departure from the traditional dominance of office towers, with high-rise apartments now comprising 14% of the new apartment supply.

Forces at play: Rising costs in construction and other areas require the development of more units per project for profitability. This economic pressure has led to a reduction in the average size of new apartment units, which dropped by 6% from 2013 to 2022. Additionally, the scarcity of large land parcels has prompted a vertical expansion strategy, particularly evident in cities like Dallas, where developers are opting for towering structures over sprawling complexes.

The market’s response: The surge in large-scale apartment buildings comes at a time when rent growth has moderated, but the demand for multifamily housing remains strong. Factors such as high home prices, limited housing inventory, and steep mortgage rates are keeping a broader demographic, including higher earners, in the rental market longer than before.

Case in point: The Couture, set to be Milwaukee’s tallest rental tower, exemplifies the shift towards upscale living and towering structures. With rents ranging from $2,000 to almost $12,000 for penthouses, it underscores the allure of large-scale projects endowed with extensive amenities—a key tenant draw. Its development, reliant on local government zoning adjustments, reflects a growing trend of city planners supporting ambitious apartment projects.

➥ THE TAKEAWAY

Looking ahead: With cities like Austin, Texas, and Portland, Oregon, adjusting zoning and building codes to facilitate larger constructions, the trend towards bigger and taller apartment buildings is poised to continue. This reflects a significant shift in the urban development narrative, where rental apartments are increasingly becoming the focal point of city living.

Microsoft Has to Bring 15K Jobs to Atlanta—or Return Land

The city of Atlanta is eagerly awaiting Microsoft’s decision on the fate of a major corporate campus that could significantly impact the city’s job market and land use.

What happened: In 2021, Microsoft excited Atlanta by announcing plans to build a corporate campus on a 90-acre site in Grove Park, promising up to 15,000 jobs. However, the project has been on hold since last year, with Microsoft reassessing its real estate needs post-pandemic. Atlanta Mayor Andre Dickens is now pushing for an update, ready to reclaim the land if the project falls through.

Broader challenges: This stall is part of a larger trend affecting Atlanta, where office vacancy rates have soared to around 24%, exacerbated by the pandemic’s push towards remote work. Additionally, the city is grappling with high delinquency rates in office properties financed through commercial mortgage-backed securities. Despite these challenges, Dickens remains optimistic about the demand for top-tier office spaces.

What about housing? While the office market struggles, Atlanta’s residential sector thrives, buoyed by strong job growth and an influx from more expensive cities. Yet, housing affordability emerges as a critical concern due to institutional investors dominating the market. To address this, Mayor Dickens has initiated a $100M housing bond, bolstered by matching philanthropic contributions, aiming to enhance affordable housing access.

➥ THE TAKEAWAY

Big picture: Amid a post-pandemic real estate slump, the success of Microsoft’s project in Atlanta could indicate the city’s appeal for big corporate investments, despite evolving work habits and housing concerns. Atlanta shines in creditworthiness, leading nationally with top ratings for its bonds from Moody’s and Fitch, and Georgia’s credit is also highly rated. Mayor Dickens emphasizes the city’s creditworthiness as a key to unlocking more projects.

Seattle’s 4Q23 office vacancy rate of 17.4% is well below the national average of 19.6%, according to Moody’s. Dayton saw the highest office vacancy rates of any major city in the country last quarter at 27.7%, while NYC unsurprisingly rebounded to a 12.6% vacancy rate, the lowest among major metros.

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