Why are there so many luxury apartments being built?
The people building luxury apartments are developers, not the actual city. These individuals are seeking to maximize profit based the environment in the market.
The first thing to understand is that developing a luxury building is not significantly more expensive than a basic building. In many cities, the main expense for a building is land rather than the actual construction costs. When properties rise in value, most of that appreciation is for the land rather than the structure. A lot of fixed costs like land remain the same regardless of whether it is premium or basic. All of the bones of the building will be of similar cost as well as the regulatory, permitting, and financing costs.
Next, let’s consider funding for projects. When it comes to financing a development project, it may be easier to get support given it is a luxury development. The purpose of some luxury apartment development projects is to attract foreign investment and investors. Wealth individuals in other countries are looking for safe and stable investments to park their money.
Just as with single family homes, building is prohibitively expensive, so luxury apartments are the only profitable thing worth building. Look around you. The houses being built are not starter homes, they are usually for wealthier individuals.
In theory, when developers build luxury apartments, wealthier tenants will move out of smaller and less premium apartments into the higher quality housing. However, this does not necessarily happen. There is no additional supply being added on the low end. In addition, the luxury apartments are not guaranteed to be occupied. Newly constructed apartments units may remain vacant.
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