Class B Apartments' Share of Net New Absorption Increases

Apartment demand has surged since Q2 2020 and currently it’s the Class B apartment sector that has had the more impressive run of late, rising from 30 percent to 37 percent, according to the National Association of Realtors.

Class A absorption accounted for 48% of absorption in Q3 2021, however that is down from its 72% mark in Q1 2020, the period just before COVID-19 began to make its mark.

Meanwhile, Class C has gone from negative net absorption to positive net absorption of 15% since Q2 2020.

Under Construction: A Shift to Class B

The current mix of apartment units under construction has also shifted toward Class B, with the share increasing to 42% as of 2021 Q3 from 36% in 2020 Q1. A total of 644,690 units are under construction, so Class B units amount to 268,748 units. This shift in construction towards Class B units will lead to a more affordable supply of new units.

Class A apartments tend to be located in the central business districts, so the declining share of Class A apartments is indicative of the shift toward suburban markets and away from the central business district with people working from home.

Another reason for the rising share of Class B apartments could be the cost of rent, as Class B units are cheaper than Class A units by about $500. Renters tended to look for more affordable apartments, given the risk of unemployment during the pandemic period.

The overall vacancy rate has fallen to a decade low of 4.5%, and the asking rent has soared to a historic high of 10.5% as well.

The demand for apartments has soared amid strong price growth, with double-digit price growth in the median single-family existing-home sales price in the second quarter in 94% of 183 metro areas.

In the western half of the country, owning has become unaffordable compared to renting. For example, in San Jose, the monthly mortgage is $6,400 which is 2.4 times the monthly rent of $2,750. Most of the affordable metro areas for owning a home are in the eastern half of the country (Midwest, South, Northeast regions).

New York & New Jersey Markets Performing Well

The New York-Newark-Jersey City metro is still the place with the most units under construction (59,013 units), followed by Washington, D.C. (30,384), Dallas (26,928), Los Angeles (26,161), Phoenix (22,307), Seattle (21,044), and Houston (20,277).

There’s huge demand for apartments in the New York-Newark-Jersey City metro area with the vacancy rate at 2.5% and in Northern New Jersey at 3.6%. Cap rates (return on investment) are currently at 5.8% in New York and 6.2% in Northern New Jersey, which make investing in these markets more favorable compared to, for example, the West metro areas of Orange County and San Diego where cap rates are at about 4% or in Austin, at 3.9%.

Class A multifamily apartments are generally built in the last 10 years and high-rise buildings in central business districts built with the highest quality materials. Class B multifamily properties have been built in the last 20 years with good quality construction and recent renovation. Class C multifamily apartments are older apartments built in the last 30 years which show age and deferred maintenance.