2020 represented a dramatic shift from the type of multifamily performance industry participants had grown accustomed to in recent years. One theme was the particular difficulty experienced by the largest markets. Another was something of a flight to affordability made evident, in part, by the divergence in performance between the price classes.

Price Class A

Nationally, and across all price classes, apartment demand fell 14% in 2020 compared to in 2019. For Class A properties, the decline was a more precipitous 38%. Net absorption totaled about 77,000 units – well short of the volume of new supply. The result was an average occupancy decline of just above 3% to close the year at 84%. Due in part to less aggressiveness on the part of operators regarding asking rents, average effective rent declined by 2% during the year. The average Class A unit closed 2020 with a monthly effective rent of $1,919.

The main culprit in the average rent retraction was the increase in both the availability and average value of rent concessions.  30% of conventional properties ended the year offering a lease concession after a nearly 40% annual increase in availability. This increase was already an established trend when the COVID-19 pandemic hit early last year. In fact, the availability of discounts doubled from the end of 2017 to the end of 2020. The average Class A lease discount closed the year at just above five weeks off a 12-month lease following a 30% annual increase.

Price Class B

Demand did not fall quite to the extent seen in the Class A subset, but even so, Class B properties suffered a 23% retraction. Net absorption totaled approximately 74,000 units after nearly crossing 100,000 net units in 2019. The effect on average occupancy was a loss of 0.5% to 91%. Operators of Class B properties were a little more aggressive with asking rent than those in Class A, and the average effective rent decline was mitigated somewhat as a result. A 0.8% annual loss brought the average unit to $1,519 per month.

Once again, lease concessions had a major impact on effective rent. The increase in both availability and average value was slightly larger than in Class A. About one-quarter of conventional Class B properties closed last year offering a rent discount, up 38% during the year. The average discount value increased by 46% through 2020 to end at just below five weeks off a 12-month lease.

Price Classes C and D

It was within these bottom two price tiers that the annual multifamily results were more positive. Class C net absorption was 44% higher than in 2019. In Class D, demand rose by 76% compared to the previous year. Average occupancy change remained in positive territory as a result for both classes, though the gain was less than 0.5% for each.

Class C properties finished 2020 with an average occupancy just below 94% while the Class D average was right at 94%. Average asking rent increased by more than 1% in each of these two tiers and this helped keep average effective rent growth in positive territory. For Class C, average effective rent rose 0.7% to $1,284 per month. In the Class D subset, effective rent growth of 0.5% brought the average unit to $1,071 per month.

The growth in discount availability was not quite as pronounced in these two price classes. 18% of conventional Class C properties ended the year offering a discount, up from 15% to open the year. For Class D, 15% of properties were offering a lease concession after a 23% annual increase in availability. Each tier finished 2020 with an average discount value of around 3.5 weeks off a 12-month lease.

Takeaways

The multifamily industry was able to weather the 2020 storm better than it appeared might be the case at mid-year. One of the perspectives from which some variance in results can be readily observed is from that of price class. A flight to affordability on the part of residents was apparent in the demand data when partitioned by price class. This affected rent growth as well, and it was in the bottom two tiers that some small annual gains were achieved. Rent concessions, both the availability and average value, rose noticeably across the board. Despite this, the increases were especially pronounced in the top two tiers.