What Does That New Luxury Building in Your Neighborhood Mean for Your Home's Value?
Luxury developments across the country can change the face – and cost of living – of your neighborhood.
Backlit apartment building against dramatic sky(Getty Images)
As a smart homeowner or renter, you keep an eye on what's happening to homes on the market and available units in your area to get an idea of how much your rent could go up when you renew your lease or how much your home's value may have increased in the past year.
But have you noticed all those construction cranes lately?
From 2006 to 2014, the number of renters in metro areas throughout the U.S. increased 5 percent, from 136.4 million to 158.4 million, according to a study by the New York University Furman Center and Capitol One. The higher demand for rental units is common in major cities like New York and Los Angeles, and it's spreading to other parts of the country that are experiencing significant population growth, like Denver.
With single-family home options either limited or out of their price range, many would-be homebuyers are turning to renting – and developers are working quickly to meet the new demand. It's not any old apartment building going in, either, but luxury developments geared to entice renters with more amenities, higher-end retail options and a lifestyle that could even tempt existing homeowners.
Regardless of whether you rent or own, new housing construction in your area could have a significant impact on how much it costs for you to live there, as well as how much your home could be worth down the line.
The majority of multifamily buildings being built are not just a newer version of your place, but they're equipped with all the bells and whistles, too, says Ryan Koechel, head of marketing for the apartment listing site Abodo.
"What we see from a lot of the new development is really developments that are larger in unit numbers, and they're catered toward millennials and the higher income threshold, so you're seeing really high amenities – rooftop pools, in-unit laundry – and all that kind of stuff has really contributed to the increase [in rent] for that matter," Koechel says.
Denver is a city experiencing a high demand for housing. A population growth of more than 5 percent from 2010 to 2014, according to the U.S. Census Bureau, has pushed up both rent costs and home values in Denver. Year-over-year growth in rental rates for the city peaked at 14 percent in July 2015, according to online database company Zillow. While rental rates will continue to climb, the pace will slow down a bit, partly from expected completion of new apartment buildings in the area, says Svenja Gudell, chief economist at Zillow.
"Given that we actually have a fair sense of what future supply is going to look like, which is going to be quite robust in Denver, we expect there to be more inventory coming online. And that itself will relax rental prices because there's more renters now, there's a ton of rental demand … and the increased supply of rental units will help ease those pressures," Gudell says.
With construction permits approved for 2016 and beyond, multifamily developments are expected in many major markets for the time being, which appears to fit with the demand in those markets, Koechel says. "For the foreseeable future, we see the demand being there. I think you've got to look more 18 months, maybe two, three years out before we start to see kind of that saturation point," he says.
A high rental rate in the same neighborhood won't have a direct impact on your home's value, but it could be indicative of other neighborhood features that will keep your return on investment climbing.
Many luxury apartment buildings bring in high-end retail on the ground level of the property – from designer clothing stores to upscale restaurants – and convey an image of walkability to the neighborhood. Often homebuyers will pay more for the luxury of being able to walk to their favorite restaurant.
"If the area's up and growing and there's a lot of activity, and it's making the area better, it should make [home values] go up," says Matt Nixon, chief operating officer of Pendley & Pendley Appraisers in Cumming, Georgia. "But if you get an area where they're just going to come in here and drop this building and there's nothing around like it and all, it could potentially have a negative impact."
The focus on high-end retailers coming in has changed with the emergence of luxury multifamily housing being built as well – developers are focusing on bringing in retail tenants that appeal to the target residents, explains Bruce Leonard, managing principal of Streetsense, a commercial real estate brokerage firm based in the District of Columbia area.
"We're starting to target tenants that reflect the desires and aspirations of the renter above. For instance, if I'm a millennial living downtown, having a yoga studio and a wine bar at the base of my building is far more desirable than having a dry cleaner," Leonard says.
Other common tenants in the retail space at the base of new, luxury apartment buildings include health clubs or gyms to act as an additional amenity for renters, and food and drink spots that are either local or national to better fit the aesthetic of the neighborhood.
For a new development to make a positive impact on nearby home values, both the developer and the neighborhood have to communicate to address the current problems in the area that might affect home values, like a section of the neighborhood that sees more crime than other areas down the block partially because it isn't well lit.
San Francisco's Pacific Heights neighborhood is known for its high-end home values, but the area had a lack of new development until developer Trumark Urban came in with a plan for townhomes and condos, called The Pacific.
The Pacific is a redevelopment of almost an acre that was previously a school of dentistry, according to the firm's managing director, Arden Hearing. He explains the property had little to no parking, and with plenty of students, teachers and patients coming in and out throughout the day, traffic in the neighborhood was a headache.
The Pacific in San Francisco(Steelblue)
When Trumark Urban came in, the potential for added housing supply with a decrease in vehicle congestion made the redevelopment especially appealing to those living in the area. "This particular site was a beacon for parking and traffic issues, so the neighborhood welcomed us with open arms," Hearing says.
With only 76 homes in the plan and one or two parking spaces per new residence, Hearing says The Pacific, which is already partially completed with the rest expected to come on the market later this year, helps to reduce traffic in the area by as much as 50 percent. And while he says "the direct impact [on home values] isn't as quantifiable," the better traffic statistics could certainly have an impact on future buyers of some of the existing homes in the neighborhood.
The potential impact on your home's value from new multifamily housing depends on what the developer includes in its plan. If the new property brings in new retail and increases the neighborhood's walkability, you could easily see your home becoming more desirable and more likely to get higher bids from homebuyers, thanks to the area's sense of community. But if the developer doesn't consider existing headaches in the neighborhood, like not enough parking, a high-density building could easily make things more difficult for you both while you live there and when you try to sell your home.
For the time being, luxury developments are successfully answering a demand. And while midlevel and affordable housing seems to be forgotten in the new development realm, they'll be back once luxury developments reach their saturation point.
At the same time, climbing values of existing homes due to a lack of inventory will eventually even out as well because, as Gudell explains, a home is only worth as much as a person is willing to pay for it, and affordability will hit a limit at some point.
"You're going to start putting a ceiling on home value … simply because people can't afford them anymore," she says.
If you're worried about being squeezed out of your neighborhood based on the cost of living, don't extrapolate too far in the future. Expectations of neighborhood improvements to increase rental rates or new inventory to relieve demand don't matter until it's already affecting the market.
Nixon stresses home appraisals won't take future developments into account because the market value of a home reflects a moment in time for the whole market: "Until it's done, and until you see how the market reacts, you don't know. Then we'll be able to tell what it's going to do."