Supply surplus set to slow luxury apartment activity in 2017

Dive Brief:

An excess of supply in the luxury apartment market is set to end a seven-year run-up and force landlords in many large metros to trim rents, according to The Wall Street Journal.
Citing a report by MPF Research, the Journal noted that while tenants rented more than 50,000 new units in the fourth quarter — six times more than a year ago — the increase was offset by 88,000 new units completed during the quarter, the most in roughly three decades.
An easing in supply is not expected in the near-term, with more than 378,000 new apartments forecast to be completed nationwide in 2017, nearly 35% ahead of the 20-year average, the Journal noted.

Dive Insight:

The luxury apartment market in large metros like New York City and San Jose, CA, has been slowing over the past year as demand is offset by a flurry of supply hitting the market. That is the result of developers responding to the pickup in demand for high-end apartments following the recession as consumers were deterred from homeownership and young professionals sought job opportunities in major urban centers where they opted to rent instead of buy.

A forecast last month by real estate listing website StreetEasy suggested a shift in New York City's housing and rent prices, with growth in Manhattan next year expected to be the slowest of all the boroughs for housing and the second slowest for apartment rents, in the wake of an easing in the luxury apartment segment. Housing and rent price increases in Brooklyn and Queens, meanwhile, are expected to continue in 2017.

With the top-tier of the luxury market cooling, developers are focusing on more moderately priced properties. Toll Brothers CEO Douglas Yearly said on a conference call last month that the company’s City Living business unit will target the middle-luxury market in New York City, with price points from $2,000 to $2,500 per square foot on projects of 150 units or less. The company recently announced plans for a joint venture to develop one such property in Manhattan’s Grammercy Park.

The Journal report noted that the rapid rise in rents encouraged homeownership, but the trend could backpedal this year as rents are set to plateau, making renting more attractive again.

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