Luxury Apartment Rents Normalize Amid Rising Construction

To date, luxury apartments are still faring well, proving resilient despite a slowdown in demand for other housing categories. Those with dollars to spend but who don’t want or can’t find a home are going the next best route—leasing a high-quality product.

From the end of last year through the first half of 2023, Class A vacancy rates rose by 30 basis points, compared to 40 and 80 basis points for Class B and C units, respectively. And development in this category will continue to be strong, according to Institutional Property Advisors’ Midyear 2023 report. Almost 200,000 new units were delivered in the first six months of the year, which was more than the prior opening six months of a year by almost 25,000 rentals. This factor is expected to cause Class A vacancies to inch up and normalize rent growth through the rest of the year.

Already, that change is occurring as the average Class A rent was up 4.5% year-over-year as the year’s third quarter began. That is below what happened in the 2021-2022 period, which was considered unusually strong, but it tracks more closely with typical years. Between 2010-2019, the average YoY growth rate in the second quarter was 4.1%. In the second half of this year, that pace is projected to lessen as vacancies continue to rise with more new products becoming available for renters to choose among.

IPA also reported that on an annual basis new high-quality units becoming available are projected to offset some flat renewals and discounted rates. At the same time, concessions are increasing a bit to lure renters—up to 9% for Class A units offering them in June of this year, compared to the smaller percentage of 7% in the same month last year.

Completions in this sector for the rest of the year are expected to remain the same as what has occurred in the first half for a total new annual record of 400,000 units or so. Looking to 2024, more luxury and Class A apartments are projected to get underway. More than 1 million rentals have already started as of last month and about 60% of them should be completed in 2024. However, many factors can delay finishing, from labor shortages to permit approval challenges, insurance adjustments, inclement weather and softer conditions.