In this month’s ALN newsletter, first quarter multifamily performance was evaluated. One interesting perspective that was not covered was a look at the quarter by market tier. ALN assigns each market to one of four tiers based on the level of multifamily stock in the market, with Tier One markets being the 33 largest in the US and markets decreasing in size down to Tier Four.

Considering only conventional properties of at least 50 units, let’s take a closer look at how these market tiers performed to start 2021.

Tier One

New construction activity ramped up in the first quarter nationally, and this increase in activity was apparent in these largest markets. About 70,000 new units were delivered across the 33 Tier One markets in the quarter, well above the mark from the same period in 2020 or 2019. Even so, average occupancy fared better than in those two prior years, with a slight 0.1% loss keeping the average just above 91%. Occupancy was essentially flat despite the flood of new units thanks to strong apartment demand in these areas. Nearly 57,000 net units were absorbed in the quarter – an almost 40% increase from Q1 2020.

Average effective rent change for Tier One markets has been remarkably consistent in recent years. A gain of 0.9% during the opening quarter of 2021 was exactly the change observed in both 2020 and 2019 for the same portion of the year. The average unit ended March leasing for $1,498 per month in these largest markets. This was lower than the $1,506 average at the close of March 2020, reflecting the challenge provided by last year. Concessions remained elevated for this tier, both in terms of availability and average discount value. Almost one-quarter of conventional properties ended the quarter offering a discount after a small decrease in availability, but the average discount value rose slightly to 4.5 weeks off a 12-month lease.

Individual markets will be profiled more in-depth in upcoming blog posts, but three areas that particularly stood out in a positive way among Tier One markets were Phoenix, AZ, San Bernardino – Riverside, CA, and Tampa, FL.

Tier Two

A little more than 7,000 new units delivered in the quarter represented a decrease in new supply from recent years, and Tier Two markets parlayed that into gains both in average occupancy and average effective rent. Average occupancy rose by 0.3% to 93% thanks to net absorption of almost 13,000 units. This level of demand was nearly triple that from Q1 2020 for these markets, and just short of double the demand from Q1 2019.

These markets managed an average effective rent gain of 1.6% in the quarter as a group, which brought the average unit to $1,156 per month. Unlike with the largest markets, the Tier Two average effective rent at the end of March was higher than that of March 2020 thanks to robust 2020 rent growth. One reason these areas have maintained positive rent growth is that the availability of lease concessions ended the quarter below the level from the end of Q1 2020. About 13% of conventional properties ended the quarter offering a discount after a small decrease in the period. However, the average concession value remained somewhat higher than is typical for these markets at 3.5 weeks off an annual lease.

Markets that stood out positively in the quarter for Tier Two include Miami, FL, Fort Lauderdale, FL, and Tucson, AZ.

Tier Three

Tertiary markets handled an increase in new supply during the quarter reasonably well. More than 15,000 new units were delivered in the first three months of the year, easily surpassing the approximately 12,000 new units from Q1 2020. Average occupancy declined by 0.3% to close March at just above 92% in the face of these new units, but once again, the damage was mitigated by an increase in apartment demand. Around 9,500 net units were absorbed in the period, which was a 46% increase from the opening quarter of last year.

Average effective rent growth matched that of the Tier Two markets at 1.6% to bring the average unit to $1,052 per month. Like the secondary markets, this average is higher than the average rent from the end of the first quarter in 2020 due to positive annual rent change last year. Acting as a tailwind for rent growth, the reliance on lease concessions decreased in the quarter, especially in terms of the average concession value. About 12% of conventional properties across these markets were offering a lease discount at the end of the quarter after a small decrease in the period, but the larger move was a 7% decline in the average discount value. After that decrease, the average concession closed the quarter at three weeks off a 12-month lease.

Tier Three markets that had an especially good quarter were Fort Myers – Naples, FL, Melbourne, FL, and Boise, ID.

Tier Four

The quarter was a little bit of a mixed bag for these smallest multifamily markets. More than 2,000 new units delivered in the period was more than double the volume of new supply from the opening quarter of 2020. This pressured average occupancy, and demand was not up to the task. The result was a 0.7% average occupancy decline to just over 92% after net absorption was negative by around 30 units. This move into negative territory was a continuation of a multi-year trend of decreasing first quarter demand in these markets. Even so, the shortfall in demand this year compared to last year was smaller than the shortfall between Q1 2020 and Q1 2019.

Average effective rent growth was buoyed both by new supply and by a decrease in lease concessions, and these markets managed the strongest gain of any tier at 1.7%. This increase brought the average unit to $982 per month. The decrease in lease concessions, both for availability and value, were also the largest of any tier. 13% of conventional properties closed the quarter offering a lease concession after a 7% decrease and the average discount value dropped by 12% in the quarter to 2.7 weeks off an annual lease.

Markets that performed especially well in the Tier Four group included Lake Charles, LA, Charleston, SC, and Rapid City, SD.

Takeaways

The first quarter was a good one for multifamily at the national level, and this mostly held true across markets of varying size according to multifamily stock. Increases in new supply were felt in all tiers except for Tier Two, a group of markets that took advantage of a slowdown in deliveries and an explosion in demand to add to average occupancy and average effective rent.

Florida was well-represented among the markets that performed best in each tier according to net rent per unit change, a metric that accounts both for occupancy and effective rent change. All told, five of the 12 markets identified across the four market tiers as having an especially strong quarter were Florida markets.

The smallest markets, Tier 4, continued on a trajectory of decreasing first quarter demand. Despite this, there are reasons for optimism. These markets saw the largest draw down as a group in lease concessions, and the negative demand was concentrated in about one-quarter of the markets classified as Tier Four. Additionally, this quarter follows a year in which these smallest markets managed a 5% net rent per unit gain – the largest of any tier.

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