Why New Apartments Are Being Labeled As 'Luxury'

What do builders do when homebuyers and renters cannot find affordable homes? Build new luxury apartments, of course. But they don't always live up to the name. Although the location may be convenient, and the design of the building is stunning, some tenants who are spending thousands a month are not impressed by the interior quality. "So, with the $3,060 per month [for rent] — if I'm really honest, I don't think it's a very good value for my money," a Washington D.C. renter told CNBC. In about a year in a half, this renter submitted 30 maintenance requests, and their dishwasher had recently flooded their apartment.

In 2022 alone, over 400,000 luxury units were created, and plenty more are expected to pop up across major cities in 2023, per CNBC. "You often see new housing branded as 'luxury,' in part because it's new," Ethan Handelman, deputy assistant secretary at the U.S. Department of Housing and Urban Development, said. However, other than being new, there are additional systematic issues contributing to labeling average apartments as luxurious.

The issues with 'luxury'

For starters, building affordable housing is just not profitable, per CNBC. Builders are saying current housing regulations are contributing to the shortage of land available for construction in U.S. cities, so the land they do have access to is going towards more valuable new constructions. "Unfortunately, I don't think we're going to see rents going down a whole lot over the next one to two years," Al Otero, a portfolio manager at Armada ETF Advisors, said. "Developers cannot make a profit at those more affordable price points. Therefore, we see the development and the new construction at the much higher, higher end of the spectrum." A shift in the standard real estate model is also a contributing factor.

"It's sort of build to sell as opposed to build and hold," Derek Hyra, professor in the Department of Public Administration and Policy at American University, said. "When you build a property and then sell it to a real estate investment trust that is controlled by Wall Street, it puts a lot of pressure on the tenants." So, although Americans desire more affordable housing, building what is deemed as a "luxury apartment" seems to currently be an easier construction and profit-making process.