As 2020 draws to a close ALN is taking a closer look at various markets around the country and how multifamily has fared this year through November. Most recently, Chicago was covered. Next up, Cleveland.
As always, numbers will refer to conventional properties of at least 50 units.
Greater Cleveland Market View
New construction deliveries ramped up this year compared to last, aligning with what occurred at the national level. A little more than 1,100 new units were delivered this year in the Cleveland market through November compared to less than 800 new units in the same period of last year. However, the bulk of new supply for the area was actually introduced in 2018, to the tune of nearly 2,500 new units.
Generally speaking, due largely to the significant decrease in apartment demand in the second quarter, new supply has acted as a headwind for both occupancy and rent growth this year around the country. Thankfully, a strong third quarter resurgence in demand lessened that impact somewhat on a year-to-date basis. Even better, Cleveland apartment demand through November was greater this year than last. Net absorption topped 2,200 units from January through November, outpacing the approximately 1,800 units from that period in 2019.
The increase in net absorption was enough to propel average occupancy to 94% , a 1% increase from the start of the year. Unlike in many markets where a resurgence in demand came at the expense of rent growth, the Cleveland area has managed a 3.2% average effective rent gain so far in 2020. Also dissimilar to many other markets around the country, both the availability and average value of lease concession packages have decreased this year. Multiple factors contributed to the effective rent gains: increased pricier new supply, asking rent increases on current supply and an organic demand increase.
Price Class View
One method of parsing market-level data that provides a particularly instructive view at a more granular level, especially this year, is to evaluate a market by price class. In a plethora of markets around the US, a distinct flight to affordability was apparent. This was the case for Cleveland as well.
Demand was strongest in the Class C subset of properties, with just more than 1,000 net units absorbed since the start of the year. Next was Class D with about 500 net units absorbed followed closely by Class A at around 450 net units. In Class B properties, net absorption totaled less than 50 units. Thanks to the influx of new units, Class A average occupancy declined by 3% down to 85% while the bottom two price tiers gained in the neighborhood of 2% each to finish above 95%. Class B remained essentially flat.
On the rent front, average effective rent growth was strongest in the Class A segment with growth a little below 3.5%. Class A properties that entered 2020 already stabilized realized a 1.9% average effective rent gain. This reflects a healthy balance of rent growth at the top of the market that is not overly reliant on new supply for those increases. Even so, the average effective rent for properties that were still in a lease-up phase at the end of November was $400 more than the average for Class A properties that started the year already stabilized. Rent growth was lowest, at 1%, for Class D properties where residents are likely to be less able to deal with increases amid such disruption this year. The middle two tiers managed gains of right around 3%.
As with the look at the Atlanta market, Cleveland has weathered the 2020 storm relatively well. An increase in new supply that could have been unfortunately timed was more than made up for by an increase in apartment demand. The result was growth in both average occupancy and average effective rent paired with a decrease in rent concession value and availability.
The story below the market-level numbers is the increased demand in Class C properties even as operators raised rents, but also the encouraging results at the top of the market within the context of the challenges brought by COVID-19 and the related disruption. Similarly, average occupancy remains above 95% for the lower three price classes and unlike some markets around the country, Class A average occupancy remains well above the 80% threshold. Lastly, there are just under 2,000 units currently under construction but not yet leasing. Given that it is unlikely all of these units will be delivered in 2021, a further surge in new supply is not anticipated. All of these are relatively positive indications for the area’s outlook moving into 2021.
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