In recent years, the multifamily housing market has undergone significant changes, primarily driven by high construction volumes and evolving tenant preferences. One of the most prominent trends has been the surge in demand for luxury apartments, which, in turn, is influencing rent growth for more affordable units. As demand for higher-end housing rises, rents for lower-tier apartments are also climbing, further complicating the affordability crisis for many renters.
Shrinking Supply of Affordable Housing
According to the National Multifamily Housing Council (NMHC), nearly 500,000 new multifamily units were built in 2024—surpassing 2023 totals. However, a staggering 77% of these new units were classified as 4- or 5-star apartments, reflecting the industry's focus on high-end construction. This trend is not new. Between 2015 and 2019, 84% of all apartment deliveries were in the 4- or 5-star category, leaving fewer affordable units for middle- and lower-income households.
Despite the rise in construction, the share of affordable apartments—those rated 1 to 3 stars—has continued to shrink. These units, which are considered affordable to most households without the need for government assistance, fell from 39% of all apartments in 2014 to just 30.3% in 2024. As luxury units increasingly dominate the market, affordable housing options become more limited.
The Ripple Effect: How Luxury Demand Drives Rent Growth for Affordable Units
The impact of luxury apartment demand extends beyond just the high-end market. Data from NMHC reveals that effective asking rents for 1- and 2-star apartments have grown at a faster pace than 4- and 5-star units. Over the past 11 years, 1- and 2-star apartments saw an average annual rent increase of 3.4%, while 3-star units experienced a 3.8% increase. In contrast, 4- and 5-star apartments grew by just 2.7% annually.
For example, in Q3 of 2024, the average rent for 1- and 2-star apartments was $1,321 per month, while 3-star apartments rented for $1,579. In the luxury sector, rents surged to $2,049 for 4-star units and $2,980 for 5-star units. The gap between these categories is significant, with renters paying $258 more for a 3-star apartment over a 1- or 2-star unit, and $931 more for a 5-star unit compared to a 4-star one.
Rising Costs for Lower-Income Renters
The rising rent prices present a significant challenge for lower-income renters. According to Census Bureau data, income limits for households in the second quintile are around $2,750 per month, while the third quintile reaches $5,183 per month. For renters in the lower income brackets, the increased costs of even 1- and 2-star apartments are becoming unsustainable. Many renters in these income groups are finding it difficult to move up to more affordable units or even stay in the units they currently occupy.
The shrinking pool of affordable apartments—combined with rising rents—has left many lower-income renters in a difficult position. Those who need affordable housing are increasingly pushed into the higher-tier rental market, contributing to the overall upward pressure on rent prices.
The Need for More Affordable Development
The market imbalance could be alleviated through increased investment in affordable housing development. However, building 1- and 2-star apartments is financially challenging without government subsidies due to rising construction costs. While the financial rewards of developing high-end apartments often outweigh those of more affordable units, the shrinking availability of lower-cost housing underscores the growing need for investment in this sector.
Without a shift in focus, the gap between supply and demand for affordable units will continue to widen, making it harder for many families to find stable, reasonably priced housing. The question remains: will developers and investors prioritize affordable housing to address the growing housing crisis, or will the trend toward luxury construction persist, further exacerbating the affordability issue?
Will the Market Reach Balance?
As demand for luxury apartments continues to increase, the ripple effects are being felt throughout the multifamily rental market. Renters at the lower end of the income spectrum are bearing the brunt of the shift, with fewer affordable apartments available and rising rents across the board. While more affordable housing development would help alleviate this pressure, the economic realities of construction costs and limited subsidies make it unclear when, or if, the balance will be restored. Until then, renters across the country may continue to face higher rents and a tightening supply of affordable units.
Comments