Rent Cuts Particularly Acute for Class B and C Apartments

Some fast-growing submarkets are seeing the deepest apartment rent cuts amid their Class B and C product, according to a new report from RealPage.

It’s not surprising to see that price declines were the worst in the year-ending Q1 in areas where the most, new apartment supply was delivered, the report said, or that rents increased in submarkets with minimal new supply.

“What might be surprising is that it was not the Class A stock – receiving the most competition from new supply – that saw the steepest rate cuts in the past year,” according to RealPage analyst Kim O’Brien.

She said that Class A prices increased for the most part across the spectrum, except for extreme cases, in submarkets where deliveries amount to more than 10% of existing stock.

But even there, rent cuts in the year-ending Q1 were moderate at 2%, according to data from RealPage Market Analytics.

It was in Class B (-3.2%) and C product (-4.7%) where price declines were steeper.

Alternatively, in submarkets where new supply was minimal, accounting for less than 1% of existing stock, Class A product saw notable rent growth of 2.6%, RealPage found.

The other product classes in these lower-supply submarkets also logged price increases but at more moderate rates.

Nationally, Yardi Matrix reported that rents climbed for the second straight month in April and approached peak levels. Rents increased by $6 in April to $1,725, up $12 year-to-date – only $2 off the all-time high of $1,727 set last summer.

Jeff Holzmann, Chief Operating Officer at RREAF Holdings, tells GlobeSt.com that rent prices, like any economic variable, are set by supply and demand.

“The past few years – and in some metros even decades – were notable for financial gains and strong opportunities in the class B and C markets, and sometimes even with core-plus strategies in B and C assets in class A locations,” he said.

“But there’s no denying that the new influx of capital expenditure was focused on renovating, upgrading, and increasing occupancy in class B and C markets. New construction is almost always considered class A at the onset.”

These years of investment focus mean that more supply of that product became available, and competition increases, Holzmann said.

“Pressure to have residents renew leases means more concessions and better experience for the consumer. The industry is seeing a short-term focus on higher class product in big metros. But the population shift from coastal large cities to more suburbs style living in-land (and Florida) seems to suggest that more supply can be absorbed in the class B and C markets for years to come.”

Jeff Brown, Founder and CEO of T2 Capital Management, tells GlobeSt.com that while it’s not surprising to see the largest YOY rent reductions concentrated in the markets confronted with the largest supply gluts, the severity of the reductions (or lack thereof) is particularly noteworthy.

Despite an estimated 670,000 new multifamily units scheduled for delivery throughout the US in 2024 – a generational high – demand remains elevated at almost a commensurate level.

“With starter homes in limited supply and mortgage rates relatively elevated, I am confident that rent reductions for high-quality, well-located products will not persist,” Brown said.

The state of rents for B & C apartments has been relatively stable, according to Patrick Hudson, Associate, Land Sales of Endura Advisory Group/CORFAC International, San Antonio.

He tells GlobeSt.com there have been minimal fluctuations in certain markets.

“While there have been isolated instances of rent reductions, particularly in areas with oversupply or economic downturns, overall, the rental market for B & C apartments remains resilient,” Hudson said.

“Factors such as increased demand for affordable housing and limited new construction in this segment have contributed to sustained rental rates.

However, it’s essential to monitor potential impacts from macroeconomic factors, such as inflation and interest rate changes, which could soon influence rental affordability and demand.

“Additionally, localized factors, such as job growth and demographic shifts, will continue to shape rental dynamics in specific regions.”

Class A Rent Deceleration

Jay Lybik, National Director of Multifamily Analytics, CoStar Group, tells GlobeSt.com that his data find the top end of the market (Class A) has seen the biggest rent deceleration since rent growth peaked at the start of 2022.

“It’s this price point that is getting the lion’s share of new supply and thus makes sense,” Lybik said. “[Class A] rent growth has been negative nationally for three quarters now. Meanwhile, [Class B] rents have remained positive and at the end of 1Q 2024 sat at 1.5%.

Luis Raúl Solá, COO & CFO, Kingbird Investment Management, tells GlobeSt.com his Class B portfolio with properties in Miami, Columbus, Dallas, New York City, Tampa, and Huntsville realized year-over-year rent growth of between 3% and 6%.

“Rent growth was higher in New York City and Columbus largely because of supply and demand fundamentals,” he said. “The new Class A supply in these markets is not competing against our assets. We have good occupancy and demand in these markets and expect continued rent growth in the portfolio.”

Robert Martinek, Director at EisnerAmper, tells GlobeSt.com, “Over the past decade, apartment units constructed pre-2010 have seen increases averaging over 4.5%, while post-2010 units have averaged rent growth of approximately 3.5%. This trend can be attributed to older apartment complexes having lower average rents and therefore more room for growth in a continued high-demand housing market.”

“There has been a large increase in the new supply of multifamily units in Q1 2024. When an oversupply occurs, it is typical to see a “flight to quality.” As a result, there has been a recent upward movement from Class C and B assets to Class A product.

“Typically, a Class A project has modern amenities that attract more affluent tenancy. Additionally, High interest rates and the lack of affordability for first-time buyers has kept the high-end rental market tight.”

Homebuyers Remain on the Sidelines

Rodney Ballinger, Vice President | Multi-Family Investments, TRI Commercial/CORFAC International, tells GlobeSt.com that rent growth in Sacramento has been most prominent in the Class A category.

“High interest rates have kept many would be home buyers on the sidelines as renters while they wait for rates to come down,” he said. “However, concessions for Class A have gone up and are predicted to continue as new to market product continues to get absorbed.

Ballinger said many of the Class A deliveries have occurred in the downtown submarket, so that market has higher concessions than suburban.

“Suburban new product is doing better than downtown as the work from home flex schedules allows renters to rent outside the downtown core,” he said.

Class B and C properties are seeing rents start to go flat or even decline, according to Ballinger.

“We still have a significant amount of migration from the Bay Area,” he said.

“Much of this population is buying homes, however there are still a significant amount that are choosing to rent, while they figure out if and where they want to buy.

“Most of the Bay Area renters are migrating to the Class A properties, so rents at B and C deals are not seeing a ton of demand, hence the flat and declining numbers. I expect to see a larger gap in the average rents between B and C product vs Class A as this trend continues throughout the remainder of the year and into 2025.”