The third quarter is now in the rear view mirror and (spoiler alert) unlike the second quarter, there are some bright spots in the multifamily results. A more full quarterly analysis will be the subject of the upcoming October ALN monthly newsletter, so be sure to subscribe down below.

One of the trends that has emerged in 2020 is a flight to affordability, with expensive markets and properties being especially adversely affected in many cases. Today we take a closer look at third quarter performance for the five most expensive US markets based on average effective rent per unit. Those markets are San Francisco – Oakland, New York City, Boston, Los Angeles – Orange County and San Diego.

New Supply

In an environment of increased uncertainty and reduced demand, new supply is going to act as a headwind to occupancy and rent growth in the near term in most markets. Given that reality, it is no surprise that of these five markets, the market which saw the greatest reduction in new supply compared to the same period last year performed best in Q3 2020. This is not the only factor, of course, but it certainly was a boon. That market was San Diego, which also happens to be an area less dense than the other four and also ranks fifth out of five for average effective rent per unit in this group.

In New York City, more than three times as many units were delivered in the quarter than were delivered in Q3 2019. The remaining three markets saw levels of new supply in the neighborhood of last year.

Average Occupancy and Net Absorption

In Boston and the California Bay Area new supply was at a typical level, but demand was far from typical. The result was a 2% average occupancy loss in the quarter for each, down to 90% and 89% respectively. In Boston net absorption was negative by just over 100 units, meaning the area experienced a net loss in rented units during the period.  In the San Francisco – Oakland market, the loss was even more substantial. A net loss of about 2,900 rented units was the worst of the five markets.

In the New York area, net absorption was also substantially negative – by around 2,600 units. Combined with increased new supply, this loss in rented units sent average occupancy down 1.3% to about 91% to end the quarter. In the San Diego market demand remained in positive territory but by the slimmest of margins. A net gain of 70 rented units was all that could be managed. Even so, thanks to the reduction in new deliveries, the area was able to hold ground at nearly 94% average occupancy.  In the Los Angeles – OC region, absorption of just more than 500 net units compared unfavorably to Q3 2019 in which about 1,600 previously unoccupied units were leased. Average occupancy closed the quarter at 91% after a 0.8% decline in the period.

Average Effective Rent and Lease Concessions

Let’s start with the “good” news first. San Diego managed 0.8% growth in average effective rent in the third quarter of 2020. This is barely half of the 1.4% gain in Q3 2019 but represents the only positive movement in this group. One reason San Diego was able to eke out a small gain is it was the only market to decrease the availability of lease concessions in the quarter. Making that possible in no small part was strong existing average occupancy and limited new supply. About 13% of conventional properties in San Diego ended September offering a discount, down from around 16% to open the quarter. Additionally, there was no movement in the value of the average lease concession.

Boston, LA and New York all performed similarly regarding rent growth. Each lost between 1.2% and 1.7% in average effective rent, led by 1.7% in Boston. Each market also saw the availability of rent concessions increase by 20% or more in the quarter, with Boston positioned well above the other two markets with a 43% increase in availability.  Boston ended the quarter with 21% of conventional properties offering a discount, exceeded by the 23% in LA but more than the 16% in New York. Unlike San Diego, the value of the average concession increased in each of these three markets – and increased precipitously in Boston and New York.

The hardest hit market for rent growth was the most expensive market – the California Bay Area. Average effective rent declined by 4.2% in the third quarter. Factor in the 2% average occupancy loss and the net rent movement was a decline of 6% per unit. 30% of conventional properties ended the quarter offering a discount after a 32% increase in availability in the period. This level of discount availability was the highest of these markets.