Theoretically, Class A apartments – upscale, professionally managed units – should bring in a lot more rent than less fancy Class B or Class C apartments. In many cases that is true. But supply can change the dynamics, according to a new RealPage analysis.
Nationwide, there is a 28% rent premium for Class A units, which in May had an average monthly rent of $2,298, compared to the Class B average of $1,795. That premium paled in comparison to Newark, where Class A rents of $4,000 brought in about 50% more than Class B, while in West Palm Beach, St. Louis and Cleveland premiums were 45% higher.
In some markets, however, the premium was much lower than the national average. In Portland, it was under 13% and in Orlando under 15%. In other major markets like Las Vegas, Anaheim, Denver, Jacksonville, Riverside and San Diego the premium was less than 20%.
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In this process, Class A rents become more affordable for households that would normally lease a Class B apartment, and Class B rents become more affordable for Class C renters. According to RealPage data, the premium on Class A rents over Class B in Portland fell to 12.7% and the premium on Class B over Class C slipped to 10.7%. In Jacksonville, the Class A over Class B premium was 17.6% and on Class B over Class C 28.3%.
"Vacancy rates have climbed highest in the areas adding the most supply, meaning renters suddenly have more options and property managers are then forced to compete by cutting rents. Importantly: This is happening across all price points," a related RealPage analysis commented.
"New housing pulls upper-income households out of older, moderate-rent housing, which then open up availability to middle-income households, and on down the line.
The report attributed this effect to a process called filtering. "In high-supply markets where rents on new leases are being cut or offered with deep concessions, would-be Class B renters can now afford a Class A unit with relatively little strain to their budgets. That creates availability in more affordable Class B units, which may then be snapped up by would-be Class C renters who, again, have seen rents compress." However, it happens only where there is ample supply.
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