Are Households 'Trading Down' To Class B and C Properties?

Even without a recession, stagnating incomes and a softening labor market may be enough to push some renters into Class B and C properties — particularly as Class A rents and single family prices continue to skyrocket in many US metros.

A recent analysis by Moody’s Analytics CRE notes that Class B and C rent growth outpaced Class A in the first half of the year, and in Q1 Class B and C absorption was greater than Class A for just the second time in the more than two decades Moody’s has tracked the data. Economists examined data from the the 11 quarters defined as recessionary by the NBER since 1999 and found that Class B and C rent growth outpaced Class A eight of those quarters, or 73%. In expansionary periods, that was the case in just 25 of 77 quarters (32%).

But this is not simply a case of renters “trading down,” Moody’s analysts say: net absorption, which is also a good indicator of demand, shows that Class A levels were actually stronger than B and C properties during the last three recessions.  Vacancy has also remained quite similar among the property types, and have just recently diverged likely due to construction pipeline variations.

“Is this a sign that households’ budgets are a bit pinched due to inflation? Likely yes, but it is also a reflection of minimal supply growth and a more social problem of persistent income inequality, two things unlikely to improve over the next couple of years,” Moody’s economists Thomas LaSalvia and Lu Chen note. “Class B/C vacancy is currently a very tight 3.1% and rent growth is around 10% annualized. While rent cannot continue growing at this rapid clip, without a greater supply of apartments and not withstanding we enter a deep recession, the less luxurious Class B/C multifamily properties will likely continue to thrive.”