Industry News

Market Reporting that Matters

Class A Apartments’ Rent Growth Rebounding

Top Tier has Foreshadowed National Trends in Past

By Louis Rosenthal | Thursday, March 30, 2017


U.S. apartment developers are on a building spree, with more than 288,000 new units delivered nationwide in 2016 and another 393,000-plus identified for 2017 delivery. Inventory growth in most major metros is well above the long-term average.

 

 Click to enlarge in new tab

Most new apartment developments are geared toward the top end of the market, and therefore generally open with some of the highest apartment rents in the metro area. In other words, new apartments are typically Class A. Generally, as the pace of new deliveries accelerates, Class A rent growth starts to slow due to increased competition. This is especially evident in urban core submarkets, with their abundance of Class A properties and the concentration of new supply within a relatively small area.

 

 Click to enlarge in new tab

This is precisely what we’ve seen since 2010. Class A rent growth exploded coming out of the Great Recession thanks to pent-up demand from the previous cycle. Between 2010 and 2011, Class A rents were growing at a rate about 100 basis points higher than Class B rents and almost 200 basis points higher than Class C rents.

However, as new apartment deliveries accelerated beginning in 2012, Class A fortunes began to ebb as Classes B and C were ascendant. We saw the same dynamics play out at the metro- and submarket-levels: In the top MSAs, pent-up demand for brand new apartments accelerated Class A rent growth in the early years of the cycle, but soon diminished in the face of a market crowded with similar product.

 

 Click to enlarge in new tab

The story at the start of 2017 is decidedly different: Nationally, Class A rent growth is on the rebound, growing by an annualized rate of 1.0% in January and 2.0% in February. This is what we would expect to see when markets (either national- or metro-level) hit bottom and begin to turn around: Class A generally rebounds first, a harbinger of an improved real estate market.

 

 Click to enlarge in new tab

The chart above examines the change in rent growth and occupancy rates among Class A assets in the top 50 markets tracked by Axiometrics. Green dots are markets that recorded stronger rent growth and occupancy from February 2016-February 2017. Yellow-dot metros strengthened in one or the other; and red dots are markets in which rent growth and occupancy rates deteriorated over the course of the past year.

 Click to enlarge in new tab

Focusing just on the markets where Class A rent growth improved over the past year, we see such diverse examples as Indianapolis, Virginia Beach and St. Louis, alongside such mainstays as Seattle, Denver and Chicago. 

 Click to enlarge in new tab

 

For example, the Denver metro, taken as a whole, had exceptional rent growth in 2015 before crashing back down to more sustainable levels in the face of 3.7% inventory growth. In 2017, with construction levels still above Denver’s long-term average, but well below the nearly 11,000 units delivered in 2015 alone, Class A assets were allowed some “breathing room” with less competitive pressure.

Over the next few years, rent-growth rates in the national and metro apartment markets are expected to get more in line with their long-term averages. This should be good news for generally strong markets currently struggling under the weight of well-above-average new supply levels, slowing job growth or both (here’s looking at you, Houston).

Like the augurs of ancient Rome examining the flight of birds, or medieval astrologers studying the stars’ alignment, the trajectory of Class A rent growth tells us quite a bit about what to expect in the months to come.

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on Forbes.com and Axiometrics’ blogs, among others.

Javascript is not enable. This may affect content rendering. You can enabled Javascript in your Settings Menu.