Why Are Apartments So Expensive? [10 Proven Facts]


Finding an affordable apartment in today's rental market can feel like an impossible task. Rents seem to creep higher every year, putting safe and comfortable housing out of reach for many people. But why exactly are apartments so expensive?

The reasons behind rising rents are complicated and multifaceted. Location, amenities, taxes, construction costs, and supply and demand all play a role. Here we'll explore 10 major factors that help explain the high price tag on apartments today.

1. Location, Location, Location

One of the biggest drivers of apartment prices is location. Properties in desirable urban centers or neighborhoods near major employment hubs command top dollar.

Access to public transportation, shopping, dining and entertainment is also priced into monthly rents. An apartment next to a subway stop in Manhattan will cost much more than a similar apartment in a car-dependent suburb.

A study by Harvard's Joint Center for Housing Studies found that rents in urban centers are nearly twice as high as in rural areas. Location accounts for a huge chunk of that price differential.

Proximity to amenities like parks, trails, top-rated schools and cultural attractions also pushes rents upwards. People are generally willing to pay more to live near desirable community features.

Of course, popular locations are in shorter supply than less central areas. Limited availability of centrally located apartments further inflates prices through the forces of supply and demand.

2. Supply and Demand Imbalances

At its core, the reason apartments are so expensive in many cities comes down to supply and demand. When demand outpaces supply for a given product, prices rise. The same economic principle applies to rental housing.

Nationwide, Freddie Mac estimates a shortage of 3.8 million housing units. There are more people who want to rent apartments than there are apartments available. This supply-demand imbalance gives landlords the upper hand to charge higher rents.

Construction simply hasn't kept up with population growth in many regions. It's estimated that 1.5 million new households form every year, but only 1 million new units are built. Unless the pace of construction increases significantly, vacant apartments will continue to be scarce.

Various economic and regulatory factors make it challenging for developers to build affordable housing quickly enough to meet demand. Rents rise as a result.

3. High-End Amenities and Facilities

Today's new apartment buildings cater to renters' expectations for resort-style amenities. Rooftop pools, fitness centers, pet spas and clubhouses have become standard features in many large complexes. These luxury facilities allow landlords to charge premium rents.

According to RentCafe's 2022 Amenity Survey, the most popular amenities prospective tenants look for are in-unit laundry, high-speed internet access, and on-site parking. Landlords know renters are willing to pay more for these conveniences.

Including amenity-rich common areas also adds to construction costs, which translate to higher rents. For example, a high-end fitness center with commercial gym equipment can cost over $100,000 to build. Expect monthly rents to be $100 or more higher in a building with such a fitness facility versus one without.

Some landlords charge additional fees for access to certain amenities like garages and bike storage rooms. These ancillary costs further inflate the overall cost of renting.

4. High Property Taxes

Property taxes are a major expense for apartment owners. These taxes are levied by local governments to fund public services like schools, parks, infrastructure and emergency services.

As property values rise, so do property tax bills. And landlords often pass along a portion of that increasing tax burden to tenants in the form of higher rents.

A study by New York University's Furman Center found that over 10% of rent costs in New York City go toward property taxes. In some neighborhoods the share was above 14%.

Property taxes are incorporated into rents across the U.S. While percentages vary by location, tax hikes generally trigger rent hikes.

Some cities and states have enacted property tax caps or freezes to help slow rising housing costs. But in many areas, regular property tax increases continue to make renting apartment units more expensive over time.

5. Labor and Material Costs

Constructing a new apartment building is an enormously expensive undertaking. Costs for materials, labor, permits and fees can total hundreds of thousands or even millions of dollars.

These high upfront costs mean developers must charge sufficiently high rents to recoup their investment and turn a profit. Rental rates are set deliberately to cover construction costs and then some.

Two major drivers of construction costs are materials and labor. Prices for vital apartment building materials like lumber, steel and concrete have soared in recent years due to supply chain disruptions and inflation.

Simultaneously, a skilled construction worker shortage has led to higher wages in the building trades. With labor costs rising, developers must ask for higher rents to meet their profit targets after a project is completed.

Government-imposed fees to obtain building permits and required inspections also bump up the final cost of apartment projects. These fees get baked into the rental rates.

Bottom line: constructing an apartment building is an extremely expensive endeavor in today's environment. Don't expect to find cheap rent in newer buildings any time soon.

6. High Finishing and Furnishing Costs

Developers don't just have to cover the core structure when budgeting for a new apartment project. Finishing and furnishing costs are also substantial line items.

Installing kitchen cabinets, appliances, flooring, bathroom fixtures and other items to make units rent-ready doesn't come cheap. One analysis found that finishings alone account for around 15% of a unit's construction cost.

Outfitting apartments with the stylish finishes and upscale appliances today's renters expect further inflates project budgets. These sunk finishing costs mean base rents must be set higher to recoup the expenditures.

Furnishing costs in higher-end buildings also influence rents. Providing beds, desks, couches and other furniture in every unit adds to a project's overall price tag.

While unfurnished units may cost slightly less upfront, they ultimately rent for lower rates. Furnished units allow landlords to command a pricing premium.

7. Limited Options for Low-Income Renters

For low-income individuals and families struggling to make ends meet, finding an affordable apartment can be next to impossible in many areas.

Extremely low rental vacancy rates give landlords little incentive to offer reduced rents. When they can easily find tenants able and willing to pay market rates, there is little motivation to provide discounted housing for lower-income brackets.

Nonprofit organizations and public housing agencies attempt to fill the affordable housing gap through income-restricted units, subsidized housing and housing choice vouchers. But demand dramatically eclipses supply, forcing many renters to pay over 30% of their income on housing.

With few alternatives, low-income renters often must resort to staying in subpar, crowded or unsafe living conditions. Some end up homeless.

Until the supply of dedicated affordable units increases significantly, average rents will remain out of reach for a large portion of the population.

8. Strict Rental Requirements

From proof of income to background checks, the rental application process has become increasingly stringent and exclusionary. Strict qualification standards make finding an apartment even harder for many.

It's now common for landlords to require that applicants make 2.5 to 3 times the monthly rent. Those with lower incomes or poor credit don't stand a chance.

Background checks and prior rental history also serve as barriers. Any evictions or criminal records often mean automatic rejection of an application.

High application fees and security deposits create additional hurdles. Forking over hundreds or thousands of dollars upfront creates a difficult obstacle for renters with limited savings.

Jumping through all the hoops is necessary when vacancy rates are low and competition is fierce. But the onerous requirements also lock people out of renting apartments they could reasonably afford.

For those unable to meet the strict criteria, the only option may be staying put in a current unit and paying escalating rents every year. There are few alternatives.

9. Lack of New Construction

Insufficient apartment construction restraints supply in many regions, leading to higher rents. Changing attitudes about new development and restrictive zoning codes are two key contributors to the shortage of new housing units.

In communities across the country, NIMBYism (an acronym for “not in my backyard”) has halted or limited housing construction. Existing homeowners tend to oppose proposals for new development, especially dense multifamily projects. They worry about perceived threats like increased traffic and neighborhood overcrowding.

Community resistance makes getting projects approved and built difficult, restricting housing supply. Less availability results in higher rents.

Outdated zoning laws also hinder new housing construction in many desirable areas. Mandatory single-family zoning prevents developers from building higher-density housing like duplexes, townhomes and apartment buildings in vast swaths of cities.

In just a small number of large U.S. metros, zoning reforms to allow for denser development could open up housing for over 29 million more residents.

Overcoming anti-development attitudes and modernizing density restrictions would remove barriers to needed housing construction. More supply would provide downward pressure on rents.

10. Significant Regional Variations

Not all parts of the U.S. suffer from astronomical rents and limited vacancies. Certain areas remain relatively affordable, while others experience much more dramatic spikes.

Generally, dense coastal cities with large economies like New York, San Francisco and Boston have the highest rents. Location near major employment hubs drives intense demand in these regions.

Other tech and industry centers like Seattle and Austin have also seen rents climb quickly in recent years. High-paying job growth is attracting new residents faster than homes can be built.

By contrast, many Midwestern and Southern cities have retained more reasonable apartment costs. Cities like Columbus, Kansas City and Louisville have lower demand and remain relatively affordable.

Of course, variables like neighborhood desirability, amenities and age of building still impact rent variances locally. But rents for comparable units are markedly lower overall in less pricey regions.

The most budget-friendly cities tend to lack booming job centers but offer a more relaxed pace of living and cheaper costs of living. Apartment hunting outside major economic hubs can yield significant savings.

Key Takeaways

  • Location near amenities, transportation and jobs substantially increases apartment rents. Desirable urban neighborhoods come at a premium.
  • Nationwide and local supply shortages allow landlords to dictate higher rents as demand outpaces new construction.
  • Luxury finishes, features and furnishings add to developers' costs, leading to higher rents in new buildings.
  • Property taxes levied on landlords contribute to rising rents over time as rates increase.
  • Stringent rental requirements like high income and credit standards exclude lower-income applicants, limiting affordable options.
  • Construction of new market-rate and subsidized affordable housing units hasn't kept up with demand in many regions.
  • Significant regional variations persist, with dense coastal cities experiencing the steepest rents, and many Midwest/Southern markets remaining relatively affordable.

Finding a reasonably priced apartment in a safe neighborhood nearby jobs, amenities and transportation is becoming increasingly difficult for many Americans. Until demand and supply achieve better balance, relief from sky-high rents will remain elusive


Meghan

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