A recent Wall Street Journal article claiming that the luxury real estate market was bouncing back has some multifamily observers scratching their heads. While several projects, including the Prairie Points apartment complex in Merrillville, Ind., and the Museum Tower high-rise condominiums in Dallas, seem to support the idea that the market for high-rise, high-end multifamily real estate is growing despite the recession, luxury multifamily is not benefitting from strong pricing power, either in the for-rent or for-sale sectors.

“This category got hit very hard in terms of rentals, with the combination of expensive rents combined with large scale job losses,” says Hessem Nadji, managing director of research services at Encino, Calif.-based firm Marcus & Millichamp. “Overall, there were reported market declines of rents of about 6 percent. The luxury high-rise category went down 9 percent to 12 percent,” Nadji says.

“Rents in new luxury rentals have been discounted heavily with concessions to facilitate lease-up. These new realistic rents generally do not provide an adequate return to support new construction,” says Ron Witten, president of Dallas-based apartment market advisory firm Witten Advisors. “Demand seems to remain weak other than in instances where prices are distressed.”

The sparks of real estate recovery may be making national headlines, but more than 60 percent of the high-rise rental product is concentrated in New York City and Chicago, while 40 percent of luxury high-rise sales take place in New York as well, explains Nadji, who adds that urbanization is currently concentrated in just a handful of markets including Miami and San Diego, in addition to New York and Chicago.

Luxury high-rise development has been on the decline for the past two years, and is unlikley to ramp up quickly. “Anything being built now was approved and finalized before the recession,” Nadji says. “I do not anticipate a major upswing for at least another three years.”

Despite the apparent stalemate in construction, the buying and selling of high-end, high-rise properties continues. Nadji said that Marcus & Millichamp is currently tracking 35 high-rise residential sales, including the Essex Syline in Orange County, Calif., which recently sold for $128 million. 

While recovery in the luxury market isn’t widespread yet, there little dispute regarding the possibility of gradual improvement. "Today’s discounted rents in new luxury buildings are attractive and have drawn many residents out of other properties,” Witten says. “So Class A properties are generally leading the market into recovery in most markets around the country.”

According to Nadji, the next 24 to 36 months could benefit the market as a whole. “Looking ahead to 2011 and 2012, there will be very few projects,” he says. “But I think it’s a good thing. There were too many projects before and we have to give the market time to grow.”