How Is The Apartment Business Holding Up? It Depends On Where You Mean

The apartment market has held up better than many had anticipated during the pandemic, but the cracks are getting bigger, and there have been some important differences in performance among types of locations, types of buildings, and price points.

Next year, programs designed to shield tenants from the hardships related to the economic downturn are looking to be much less aggressive than they were earlier this year, which could result in some renters needing to double up, taking roommates, or living with family members, reducing the number of units demanded.

Luxury rental units have seen net negative absorption (read: demand) compared with

last year, according to ALN Apartment Data, and these “Class-A” buildings have suffered declining rents in recent months. This has occurred during a year of increased completions of new buildings. The reduced absorption and increased supply means that the time needed to lease up a newly-constructed multifamily building has stretched out.

Rent collections meanwhile have held up surprisingly well throughout this crisis up until the first week in December, which saw lower collections than prior months.

The first half of 2020 saw a decrease in demand due to the pandemic, down to levels lower than the pace of new construction. But by the third quarter of the year, demand had regained enough strength, particularly in the south and west, to once again pull ahead of the pace of new apartment completions.

But the apartment picture cannot be painted with a single brush. There is a widely different experience across geographic markets and across TYPES of markets.

Suburban Submarkets Doing Best

First, there is a big difference in apartment trends between urban and suburban areas. A study just released by the Harvard Joint Center for Housing Studies (JCHS) analyzed the surge of vacancies in apartments, showing that the vacancies are concentrated in the urban centers of the major cities, but that the suburban rentals (the blue line, below) are retaining their tenants rather well.

There was already a trend toward more demand in suburban apartments before the pandemic, and the health crisis has only accelerated that already-existing trend. In a big way.

Wide Variation In Experiences By Market

Second, the “national numbers” do indeed show a decline in average rents, but the declines have been heavily concentrated in the largest metropolitan areas, and within the urban centers of those cities; New York and San Francisco have been hit hardest.

Orlando, Florida took a beating when hotels and theme parks furloughed thousands of workers, which sent average rents and occupancy rates lower. Within the State of Florida, this market has been hit the hardest by recent events. The “effective rent” line in this graph of ALN data includes concessions and promotions that are used to attract tenants.

Resident retention rates when leases come up for renewal are falling in the Orlando market; the latest retention figure from RealPage
RP
is 46%, down from 52% a year earlier. It is important to note that the worst pain is concentrated in the areas near the theme parks. Other parts of the Orlando apartment market are doing comparatively better.

Most other Florida markets suffered a brief dip in effective rents, but are back to pre-

pandemic levels of revenue. Two Florida markets are actually doing better now than they were before the pandemic hit. Those markets are Tampa and Jacksonville, whose economies are less dependent on tourism and hospitality jobs than Orlando or Miami.

There is also a difference across types of buildings. Class-A buildings saw the largest increase in vacancy rates since the pandemic began, and Class-C buildings saw the smallest increase, though in the third quarter of 2020, all classes of apartments saw a very welcome reduction in vacancies compared with the second quarter (though they are still higher than before the pandemic). Achieving this improvement did require some increases in concessions in Class-A buildings (”two-weeks free” has become fairly common, to attract new tenants).

A new report from Rental Beast adds that some markets are resorting to a stacked set of concessions. In Atlanta, apartment managers are bundling multiple concession offers to attract tenants. In many cases tenants claim as many as three concessions packaged into a single, special offer. These 3-for-1 specials can include one month’s worth of free rent, a $500 gift card, and a 50% reduction in pet deposits and fees. In November, a rental company offered a Veteran’s Day special, waiving all application and rental fees, or charging a flat $11 administrative fee for servicemembers. One company is giving air fryers away to tenants who sign a lease within 48 hours of viewing a property, along with a month’s worth of free rent.

The Harvard study shows that over a long timeline, rents have risen the fastest in large

buildings. Over the past 15 years, rents have risen by 30% in buildings of 20 units or more, but half as much in smaller apartment buildings.

Single-family homes for rent have been experiencing solid increases in rents for the past fifteen years and they have shot up even faster since the pandemic hit, driven by more people wanting to have their own entrance, private outdoor space, a garage, and a spare room for a home office. The increased availability of built-for-rent single-family homes in some markets has created another source of competition for apartment buildings (although single-family home communities rarely match up to the suite of recreational amenities that an upscale apartment complex typically offers).

The Demand Side

One of the very brightest of the bright spots in the supply-demand picture is the pace at which households are being formed, driven in large part by millennials getting a place of their own, splitting off from roommates or relatives with whom they had been sharing a place.

The pace of household formations is one of the most important indicators of the demand for new residences. The JCHS tabulated data from the Census Bureau, now showing that the pace of household formations is back to a strong 1.5 million per year, and a certain share of these will opt for rental housing of some sort or another.

One of the most important shifts in the rental market in this cycle has been the rise of the high-income renter. These tenants are called ‘renters-by-choice’ because they could buy a home if they wanted to, but they simply prefer renting for the flexibility and maintenance-free lifestyle that it offers. The Harvard JCHS report shows that higher-income households (defined as $75,000+) have made up half of the growth in renter households, rising by 4.6 million nationally during the past 15 years; their share of renter households jumped from 18% to 26%. I believe this is a trend that will persist.

Apartment owners are faced with would-be tenants who must be reassured that apartment living is safe in a world of ongoing contagion. Some apartment developers are looking at designs and features that can help attract tenants, promoting their balconies and outdoor spaces and special design features that will cast their building in a positive light compared with buildings that were designed pre-pandemic.