The January edition of the monthly ALN newsletter was a fairly broad look back at 2021. One of perspectives touched on was price class performance, but space constraints necessitated more a summation than a detailed look. As promised in the newsletter, today’s post will offer a more detailed view.
As a reminder, all numbers will refer to conventional properties of at least 50 units.
Apartment demand in the Class A subset in 2021 was astounding, with net absorption totaling a little more than 200,000 units. Over the last five years the previous annual high had been in 2017 and 2018 when about 120,000 net units were absorbed in each year for this price tier. The 2021 value was more than in 2019 and 2020 combined and represented an increase of about 167% from 2020.
When considering net absorbed units as a percent of units available to be leased, approximately 56% of available Class A units were leased in 2021 – the highest value for any price class in any of the last five years. Despite accounting for only about 13% of nationwide conventional units, Class A properties accounted for more than one-third of total US net absorption in 2021.
Class A average effective rent rose by 16% last year, bringing the average unit to about $2,175 per month. That rate of appreciation was the highest in the last five years, though 2017 did come close. The 2021 jump in average rent followed a loss of nearly 4% in 2020.
Lease concessions played a role in the growth, with a 63% annual reduction in availability resulting in only about 15% of Class A properties offering a discount by the end of the year. A drawdown on 33% in the average discount value meant that the average lease concession package for a new Class A lease was less than one-month off an annual lease to close December.
Three markets of particular note for Class A properties were Fort Myers – Naples, Phoenix, and Tampa. Both Phoenix and Tampa ended the year as top 10 markets for both net absorption and average effective rent growth within the Class A space. Fort Myers – Naples ended the year in the top 10 for Class A average effective rent growth and net rent per unit growth, a metric that accounts both for occupancy change and effective rent change.
Similar to the Class A group, Class B properties experienced very strong demand in 2021. Around 180,000 net absorbed units was more than in 2019 and 2020 for those properties and represented a 145% increase compared to the 2020 annual number.
Class B properties also managed to lease just over 50% of available units during the year, which was considerably higher than in any year of the last five. It is important to remember when considering this metric that units delivered late in the year are included in the total units available to be leased despite the fact that property lease-ups take time. While Class B does not have the same influx of new supply as Class A, new units do enter the market in this tier.
Average effective rent growth was slightly higher for Class B properties than in Class A last year with an annual gain of 17% bringing the average Class B unit to about $1,770 per month. This annual gain followed a 2020 loss of just over 1% at the average and blew the previous high over the last five years of 8% in 2017 out of the water.
A decrease in lease concession availability in excess of 60% during the year resulted in only 10% of Class B units offering a new lease discount to end December. The average discount value was almost exactly that of the Class A group by the end of the year – a little below four weeks off an annual lease.
For the Class B subset at the market level, Florida was the main story. Orlando and Tampa were the only markets in the nation for be in the top 10 for both net absorption and average effective rent growth for this group of properties, although Austin just missed in the rent growth category. Florida markets also took five of the top 10 spots in the country for annual rent growth, included each of the top four spots. From a net rent perspective 8 of the top 10 markets for Class B net rent per unit growth were Florida markets, included all of the top six.
As should sound familiar by now, Class C apartment demand in 2021 was also well outside the typical range. More than 125,000 net absorbed units was more than in 2019 and 2020 combined, as with the top two tiers. Similarly, more than one-third of available units were leased, which was also the highest mark for this group in the last five years. Average occupancy to end December was 95%, lower only than the 96% for Class D.
After a 60% decline in lease concession availability, only 8% of conventional Class C properties were offering a discount to close the year. Combined with an aggressive increase in asking rents, average effective rent was propelled upward by 14% to about $1,470 per month. This 14% increases followed a 2020 gain of just more than 1%.
For the Class C subset, Austin and Orlando were within the top 10 markets for net absorption, average effective rent growth, and net rent per unit growth. Florida as a whole was once again well-represented, accounting for six of the top 10 markets in net rent growth and each of the top four markets.
One market on the other side of the coin that stood out in the data was New York. Despite having one of the highest net absorption totals in the country for Class C in 2021, a negative move in average occupancy and average effective rent growth about half of the national average put the are in the bottom quartile of markets for both effective rent and net rent change.
With just under 50,000 net units absorbed in 2021, Class D properties also managed a level of demand greater than in the two previous years combined. On a percentage basis, the 2021 number did not overperform 2020 to the extent seen in the other three price classes but was still more than double the roughly 24,000 units from 2020. As previously mentioned, this drove an already high average occupancy even higher to 96% by the end of the year.
Average effective rent rose by nearly 8%, making Class D the only price tier not to touch double-digit rent growth. The gain brought the average unit to approximately $1,155 per month. The annual appreciation was closer to some of the top-performing recent years than was seen in the other price classes but was till the highest of the last five years.
As would be expected with such a high average occupancy, lease concession availability was the lowest of any price tier for this group at the end of 2021 with only about 6% of conventional properties offering a discount for new residents. The average lease concession value matched than for Class C properties – right at three weeks off an annual lease.
Austin was the only market to land within the top 10 across net absorption, average effective rent growth, and net rent growth, but Raleigh – Durham, Boise, and Myrtle Beach managed to crack the top 10 in the latter two metrics. Of the four price classes, Class D was the only one not to have Florida markets heavily represented at the top of the list.
The multifamily industry saw record apartment demand and rent growth in 2021 at the national level, and this played out across the price classes. That each of the four classes outperformed previous years to such an extent was an encouraging indication of the broad-based nature of the positive results for the industry rather than being driven by one specific property subset.
The large gateway markets were well-represented at the top of the list for net absorption in all four price classes but were prevented from being atop the net rent per unit gain list in most cases by lower rent growth relative to other markets around the country.
As was mentioned in the January ALN newsletter, the rent growth seen in 2021 is sure to exacerbate affordability concerns, but this is particularly true with the double-digit growth in the Class C sector. These residents generally have less financial flexibility than residents in the top tiers, as this may create more divergence in 2022 performance. Additionally, rent growth headlines are fueling calls for rent control and related measures in markets around the country that will be an important challenge for the industry in the coming year.
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