Where people aspire to live these days have shifted over the last decade or so, further populating big cities like New York, Chicago, and Los Angeles in addition to hyper-populating others that weren’t quite ready for a boom, such as Denver, Portland, and Seattle. With new people moving in, additional housing is inevitable and necessary to stave off shortages and outrageous prices. However, an old concern has reemerged that seems to be a mix of artificial housing shortage and good old fashioned abuse of zoning rules.
Not every new development of housing being built is considered affordable; in fact, it would seem that most of the newer developments are being slated as luxury apartments or condominiums. Granted, not every development will be affordable for everyone, but in more competitive metros very few are being made available to the average buyer. Many people are taking offense to the fact that developers only seem to be building for the top 10 percent on the economic scale. Many others have legitimate fears of either being kicked out or priced out of their current residences in due time thanks to price hikes. What is behind the reasoning of building mostly luxury-level living spaces when affordable housing is desperately needed in many cities?
Are developers simply being greedy, or is this all a simple matter of supply and demand? For real estate developers, its important that they will see a return on their investment, just like any other business investor. Will the payoff be worth the upfront cost of building an affordable-priced apartment building? This question is partly why developers like to upgrade to luxury: the chance at actual profit. Many developers admit that building a nice new building, but setting rental pricing at affordable, or below market value, rates puts them in the red as doing so doing is considered a negative cash flow. Luxury units bring in more revenue to offset the millions of dollars that were poured into making the building a reality. Another part of their initial costs is buying the land on which to build on; if a larger more luxurious building is put on the property, its value increasing exponentially. And more units per building means more money in rent per month.
While most major cities that are currently experiencing rapid growth are dealing with the issue of affordable housing versus building more luxury multi-family dwellings, New York City has become the poster-child for overbuilding luxury buildings. For many years, New York City has offered incentives like 421-a and Inclusionary Housing Program (IHP) to developers to get them to build housing in the city as land is at a premium and expensive. Many major cities have their own versions of the IHP in which developers can build larger building than standard zoning allows for so long as a certain percentage of the units built are allocated to be priced below market value. While there has been some success from this program, there have been rifts such as the “Poor Door” controversy, in which a new luxury high-rise at 40 Riverside on the Upper West Side installed a separate entrance into the building for the low-income tenants to use to “avoid awkwardness that may occur between people of differing backgrounds.” Instances like this seem to be fanning the flame of economic discrimination that seems to be brewing in New York and elsewhere.
Many existing residents in growing cities are worried that they will be sacrificed to make way for the seemingly exclusive “millionaire’s playground” that developers are building in the city; at the rate of building new complexes, living in the city may be reserved only for people who have million-dollar plus bank accounts and force poorer residents to venture into the suburbs and exurbs. The 421-a measure in New York is looking to be amended by Mayor Bill de Blasio to close loopholes in the law to stop benefiting luxury apartment and condominium development. Mayor de Blasio firmly believes that New York “can’t be a city of just penthouses.” As the law stands now, developers can subsidize building luxury buildings on the public’s dime, but only benefits a select few. This situation has understandably upset a lot of New Yorkers, even leading to protests outside of some of the subsidized luxury structures.
Despite the resistance from the public, developers continue to build luxury residences in prime city locations. However, one has to wonder what the actual demand is for these enormous structures that cater to only to the millionaires and billionaires of the world. Developer Adam Gordon explains that he got out of the real estate space while he could because he knew that continued development of these luxury complexes would make the market more volatile, and told the New York Times that “Residential development has gotten too risky; it is just not a good bet. A lot of the guys who are staying in the game now are gamblers, and I’m just not one of them.” Gordon also believes the demand is very much unknown for luxury units since the pool of residents in any city for said residences is very small in comparison to the growing demand for affordable housing.
If anything, too much supply of these luxury units will affect any resale value they have and force many buyers to just say no. Curbed analyzed the volatility of overbuilding these expensive apartments and conceded that “some see the surge in ultra-luxury apartments as the beginning of a cycle in which potential buyers believe the supply of uber-expensive apartments is exceeding the demand and pull out of massive deals ahead of a speculated diminished resale values. Others believe the surge will lead developers to focus on building smaller mid-level, more attainable apartments.”
For existing multi-family residences, the fear of being forced out because the owner sold the building to a developer to be transformed into expensive condos is not the only fear in play. As population growth takes place, the local rental rates begin to jump as well. Some rent control is in place for qualifying tenants, but it is often not enough to keep landlords evicting them when given the chance to do so. The displaced residents will often seek new housing further away from the city, but if they are low-income earners, commuting to the city for work becomes a real hardship. While there are some developments that are taking mixed income levels within the same building to heart, much more is needed to create a strong balance in the cities of America.