2020 has been a bumpy ride for the multifamily industry, especially the second quarter. Although the impact of COVID-19 and the new economic environment has been felt across the board, there are some distinct differences in how that has played out on the ground. One angle from which some differences become apparent is from the perspective of price class.
ALN assigns conventional properties of at least 50 units to one of four price classes, A through D, based on each property’s market percentile rank for average effective rent per square foot. This allows for a more apt comparison of properties across markets of different sizes and regions.
Despite delivering roughly the same number of units so far this year as were delivered through July of 2019, average occupancy for Class A properties around the country fell by 3% to just under 85% to close July 2020. Not only was this loss the largest of the four price classes, but it follows Class A properties leading the four price tiers in average occupancy growth during the same period last year. This drastic turnaround was brought on by a 65% decrease in net absorption compared to the first seven months of 2019. A little more than 25,000 units have been absorbed in Class A properties this year down from around 72,000 units by July of last year.
Among the 33 largest multifamily markets according to unit count, five have suffered a net loss of rented units this year. None were harder hit than San Francisco – Oakland, where Class A properties experienced a net loss of more than 1,600 rented units. On the flip side, the Dallas – Fort Worth market absorbed many more Class A units than any other market. In fact, net absorption totaling a little more than 3,600 Class A units was enough for the DFW area to double the second-place market of Washington DC.
Average effective rent growth for the top price tier was 0.4% through July. For context, in the same period last year, average effective rent growth for the top price tier was 2.9%. The low growth was not just a result of less aggressive asking rents from operators, but also of a reemergence of lease concessions. At the end of July 2019, only about 18% of Class A properties were offering a discount after a 13% decline in availability from the start of that year. This year, a 13% year-to-date increase brought the share of Class A properties offering a lease concession to 25%.
Class B average occupancy fell by 0.8% from the start of January to close July at just under 91%. About 50,000 units have been added to this group so far this year, down from 60,000 during the same time last year. Some of these units were new deliveries, but most were pushed into Class B by expensive new properties coming into Class A. The reduction in added units was not enough to offset a demand loss of 52% compared to last year. About 29,000 previously unoccupied units were leased this year, down from around 60,000 last year.
Average effective rent for this group of properties gained 0.2% through July, a far cry from the 3.3% increase seen last year. Class B properties saw the second largest increase in concession availability and the largest increase in average discount value. About 20% of these properties were offering a discount to close July and the average concession value was about one month off a 12-month lease after an 18% increase in average value this year.
Whereas net absorption fell well short of added units in the top two price classes, the bottom two tiers managed to add more newly rented units than were pushed down from Class B to Class C. Average occupancy for Class C properties was unchanged from the start of January, hovering right above 93%. 28,000 newly rented units were enough to maintain occupancy, though that demand fell short of the 48,000 net absorbed units in the same period last year.
It was within this subset of properties that average effective rent grew the most. Unfortunately, a 0.5% gain was enough to earn that designation. Last year through July, Class C rent growth was about 3.1%. There was not much increase in either the availability of concessions or the average value. About 17% of properties were offering a discount to end July, with an average value of three weeks off a 12-month lease.
Class D properties entered the year with the highest average occupancy of the four groups, and this tier is the only one to have any kind of gain so far this year. That gain was a paltry 0.2% to remain just under 94%, but it is a gain, nonetheless. About 12,000 previously unoccupied units were leased through July, down from just over 21,000 units through July last year.
Average effective rent growth was unchanged for these properties in the first seven months of the year, staying at $1,057 per unit. Unlike the Class C properties, there was a substantial move toward concessions in this group, a 19% year-to-date increase resulted in about 15% of properties offering a discount.
The first quarter was relatively unaffected by the COVID-19 disruption, and the second quarter is typically a strong part of the year for a seasonal industry like multifamily. This makes the dramatic decreases in both demand and average effective rent through the first seven months of 2020 all the more concerning.
It’s clear the top two price tiers have been most negatively impacted so far this year. In looking at net rent per unit to account both for occupancy and rent changes, Classes A and B have negative returns this year while the lower-priced properties have at least managed some slight gains.
The new construction pipeline will continue to act as a headwind in the short term, especially for the top two price classes. The extent to which these properties can defend occupancies without further reliance on rent concessions as we move through the third quarter will be telling.
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