Despite strong demand dating back to the third quarter of last year for the multifamily industry, rent growth was largely absent until the calendar turned to 2021. So far this year, strong demand has been sustained and average effective rent was up by a little more than 2% nationally through April. One factor that has aided that growth has been the beginning of a drawdown in lease concessions after a dramatic increase in reliance on discounts last year – especially in the largest markets.

As always, numbers refer to only conventional properties of at least 50 units.

National View

18% of properties were offering a new lease discount at the end of April after a 9% decrease from the start of the year. Concession availability remains higher than April of last year as the pandemic was setting in, and higher than the 14% of properties offering a discount in April of 2019. Even so, availability is now not far from pre-pandemic levels and a nearly double-digit decline through the first four months of the year is an encouraging development.

There has not been a similar reduction in the average concession value. The year opened with the average concession package value at just above four weeks off an annual lease, and that is where the average remained at the close of April. A substantial delta remains between the current average and the three weeks off an annual lease that was the average in April of 2019. Though discount availability has already begun to increase by April of 2020, the average discount value had not materially increased from the April 2019 level.

Market Size View

One aspect not made clear by looking only at national numbers is the fact that the significant move toward lease concessions during 2020 was mostly a story for the largest markets. ALN assigns each market to one of four tiers based on the market’s multifamily unit count. Tier One markets, the 33 largest markets according to multifamily stock, were the only group to see increases in discount availability. For secondary and tertiary markets, split between the remaining three market tiers, availability actually decreased last year. Of course, this does not mean that there weren’t smaller markets pulling the concession lever. There were some large increases, especially in areas with a large portion of the economy dependent on travel or the energy sector.

Through the first four months of 2021, discount availability decreased across all four market tiers. The largest decreases were in the smallest markets – Tier Three and Tier Four. For each, the decrease in availability was more than 10%. For secondary markets, Tier Two, the move fell just short of that mark at 9%. For the largest markets, areas with the highest levels of concession availability entering 2021, an 8% reduction brought the share of properties offering a lease concession to 22%. While it is a positive development to see concession availability subsiding some, 22% remains higher than the 15% of properties offering a discount in April of 2019 for these largest markets. For the three market tiers outside Tier One, concession availability finished April at the same level, or lower, than at the end of April 2019.

The story is similar regarding the average discount value. The largest decreases were in the smaller market tiers, and the highest average values are seen in Tier One and Tier Two. For the largest markets, the average package ended April at 4.3 weeks off a 12-month lease. For the smallest markets, the average was 2.6 weeks of a 12-month lease.

Price Class View

Significant differences in the concessions picture also emerge when evaluating multifamily by price class. A more detailed analysis by price class is the topic of the upcoming May ALN newsletter, so be sure to subscribe below.

Around 28% of Class A properties were offering a lease concession at the end of April with an average discount value of five weeks off an annual lease. This was after a 17% decrease in discount availability and an 8% decline in the average discount value. Class B properties also managed a double-digit decrease in availability down to 21% of properties offering, but the average concession value was unchanged at 4.7 weeks off an annual lease.

Class C properties fell right in the middle of the results from the top two price classes with a decrease in both metrics of approximately 8%. At the end of the period, 17% of these properties were offering a lease discount and the average discount value stood at 3.6 weeks off an annual lease. Class D properties were the only group to see the availability of discounts continue to rise, but only marginally so. After aa 1.5% increase in availability, 14% of Class D properties ended the period offering a concession. The average discount value also rose, but by a more significant 9%. This change brought the average package value to 3.4 weeks off an annual lease.

Market View

Three markets closed April with more than one-third of properties offering lease concessions: Houston, San Antonio, and San Francisco – Oakland. Houston led the way at 40% of properties offering with the California Bay Area sitting in third at 37%. When factoring in the average discount value, San Francisco – Oakland catapults to the top of the list in terms of concession impact of the market with an average discount of just under 5.5 weeks off an annual lease.

On the other side of the coin, 25 markets around the country ended April with 5% or less of properties offering a discount. Only one of those, Buffalo – Rochester – Syracuse, has more than 1,000 conventional properties and only one-quarter of the markets crack 500 conventional properties. These 25 markets include areas like Boise, ID, Madison, WI, Spokane, WA, and Toledo, OH.

For more detailed information on specific markets, be sure to refer to our complimentary Market Review reports.

Takeaways

At the national level, concession availability has decreased from the start of the year, but the average discount value has not. Lease discounts remain much more a factor for the largest markets, with availability being almost double that of the smaller market tiers. From a price class perspective, though concession availability and average value remain elevated for Class A and Class B properties, it has been within these subsets that the largest reductions have occurred through the first four months of the year. For Class D properties, both concession metrics have increased this year, a reflection of the struggles still faced by these residents. With apartment demand continuing it’s more than three consecutive quarters of strong results, the COVID-19 vaccine rollout continuing apace, and the ongoing move toward more normal economic activity – concessions are likely to continue to recede.

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