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Apartment-building boom catering to wealthier renters, Harvard study finds

During the recent construction boom in apartments, developers have tended to build upper-end apartments in high-cost cities. That’s because these projects are more profitable, but it also is being driven by demand in that sector, according to a new study by Harvard University’s Joint Center for Housing Studies.

Harvard's study found that the numbers of renters increased across all income types and age groups, but rose the most at the top and bottom of the spectrum. By income, more affluent homebuyers  — those earning $50,000 or more — have accounted for the second highest-growth group among renters in the past decade, Harvard said. Also, people in their 50s and 60s — an age group that tends to have more money — accounted for the largest growth group of renters over the 2005 to 2015 period. More than 4.3 million baby boomers joined the ranks of renters, the study said.

“There has been a lot of public discussion about the size of the millennial generation and about new development, the luxury development at the high end,” said Jon Spader, a senior research analyst with the Joint Center for Housing Studies. “What you see from across age groups, incomes and household types, there’s pretty robust growth at all levels.”

Harvard’s study also cited an emerging crisis in rental affordability.

The largest single group of new renters over the past decade — a cohort of 4 million people — earn less than $25,000 annually, the study said.

The study noted a surge in multifamily construction, and that an estimated 400,000 new units will be produced overall in 2015. But where the market has ramped up the supply of rental units for more affluent people, it is generally not producing affordable units.

“The main story of the last five to 10 years is that renting has become much more frequent,” Spader said. “There is also a burst of new construction, but we are seeing reduced vacancy and increased rents as well, which means that those new additions aren’t keeping up the increase in renter households.”

An emerging affordability crisis

The Harvard study found that rents rose 7 percent between 2001 and 2014, while real incomes fell 9 percent. As a result, the numbers of cost-burdened renters paying more than 30 percent of their income on rent rose to 21.3 million, up from 14.8 million in 2001. An apartment is deemed “unaffordable” if rent represents more than 30 percent of household income.  

Rents rose to a national median average of $1,372 a month in 2014, which is not affordable for a typical renter, the study said. The Harvard analysis also estimated that only 10 percent of the newly constructed units have asking rents below $850, a level that about half of all renters could afford. 

“Households with lower incomes are likely getting pinched the most,” Spader said. “Their ability to find units that are filtering downward to lower rents is more and more constrained if new supply isn’t keeping pace with demand.”

Harvard’s study didn’t look closely at the issues of financing lower-end apartment projects, but said that government subsidies to promote affordable housing have been “limited" and largely insufficient to meet the needs.

George Ratiu, a commercial analyst with the National Association of Realtors, said zoning is often one of the biggest obstacles to producing affordable units. That also is a difficult problem to overcome on a national basis because each locality has different zoning.

“Ultimately what drives the cost of development boils down to zoning in a lot of urban environments,” Ratiu said. “Zoning is what makes the development process so expensive, which, in turn, [means] they have to charge so much for rent.” 


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