Top Five Markets: Units in Lease-up

With the current global pandemic still showing little sign of abating, and the responses to the virus taking their toll on the economy, uncertainty is a theme of 2020 so far.

One area of uncertainty is what the impact on the new construction pipeline will be. According to National Multifamily Housing Council, 56% of surveyed construction firms are experiencing construction delays of some kind. For some markets around the country, a slowdown in new supply is timely. What is not uncertain is that the impact of units already in lease-up cannot be delayed.

With that in mind, let’s take a look at the top five markets in volume of lease-up units and consider how their Class A properties performed in the first quarter. In doing so, only conventional properties of at least 50 units will be included. The top 12% of properties in a market in terms of average rent per square foot are considered Class A.

Nationwide

Before diving into specific markets, lets take a look at some national numbers to provide some context. National averages are derived not from the top 12% of nationwide properties in terms of average effective rent, but rather weighted averages are calculated from the various Class A properties in each ALN market. Numbers in parenthesis refer to Q1 percent change.

Class A – By the Numbers

Avg. Occupancy: 86% (-1.3%)

Avg. effective rent: $1,991 (+1.1%)

Properties Offering Concession: 21% (-3.2%)

Avg. Value of Concession: 3.8 weeks off 12-month lease (+7.1%)

    1. Dallas – Fort Worth: 16,800 Units in Lease-Up

Class A – By the Numbers

Avg. Occupancy: 82% (–)

Avg. effective rent: $1,705 (+2%)

Properties Offering Concession: 39% (-8.1%)

Avg. Value of Concession: 3.8 weeks off 12-month lease (-5.1%)

Looking Deeper

The 82% average occupancy is actually the highest mark coming out of a first quarter for the market since 2017 when occupancy to end March was also 82%. Quarterly demand was stronger this year than in any of the three previous years, with Class A net absorption topping 2,000 units.

Stabilized-only Class A properties have been able to maintain average occupancy above 92% while managing to improve effective rent performance, but these properties have lost a net 200 rented units over the last three quarters.

     2. Washington DC: 9,500 Units in Lease-Up

Class A – By the Numbers

Avg. Occupancy: 81% (-1.1%)

Avg. Effective Rent: $2,746 (+0.6%)

Properties Offering Concession: 23% (+2.4%)

Avg. Value of Concession: 3.9 weeks off 12-month lease (+1%)

Looking Deeper

Stabilized Class A properties in the DC area have performed well relative to other markets, whereas results for new properties entering the market are somewhat softer. Thanks to stable demand in recent quarters, average occupancy for stabilized-only properties was 94% to end the first quarter – the highest average of the five regions on this list.

Among properties that had yet to reach 85% occupancy by the end of March, 75% were offering a lease-concession. This area is one in which new properties are entering the market at a price point below that of the existing Class A properties. In fact, properties that have yet to stabilize have an average effective rent on-par with stabilized Class B properties.

    3. Houston: 9,300 Units in Lease-Up

Class A – By the Numbers

Avg. Occupancy: 86.3% (-1.2%)

Avg. Effective Rent: $1,804 (+1.9%)

Properties Offering Concession: 34% (-8.7%)

Avg. Value of Concession: 4.6 weeks off 12-month lease (-3.3%)

Looking Deeper

While Class A average occupancy and effective rent growth look strong, both the availability of rent concessions and their average value are above the national average. The first number that really stands out is the average of nearly five weeks off a 12-month lease.

Average effective rent growth for stabilized Class A properties bounced back with a 1.1% gain in the quarter after suffering a retraction in the first quarter for the three previous years.

    4. Denver – Colorado Springs: 8,600 Units in Lease-Up

Class A – By the Numbers

Avg. Occupancy: 82% (-2.1%)

Avg. Effective Rent: $2,032 (+3.4%)

Properties Offering Concession: 26% (-8.7%)

Avg. Value of Concession: 3.8 weeks off 12-month lease (-15.5%)

Looking Deeper

Deliveries ramped back up to their highest Q1 level since 2018 and net absorption was at its lowest Q1 level since 2017, resulting in the average occupancy dip.

Average effective rent growth in the quarter was very strong at 3.4% – both overall for Class A properties and for Class A properties that entered 2020 already stabilized. The average concession value for stabilized-only Class A properties is well below that of the other four markets on this list.

    5. Los Angeles – Orange County: 8,550 Units in Lease-Up

Class A – By the Numbers

Avg. Occupancy: 84.2% (+0.7%)

Avg. Effective Rent: $3,123 (+2%)

Properties Offering Concession: 27% (+17.7%)

Avg. Value of Concession: 3.9 weeks off 12-month lease (-12.4%)

Looking Deeper

Only two new properties were added to the market to open 2020, and average occupancy was buoyed as a result. This makes the third straight year that first quarter average occupancy rose for Class A properties.

Stabilized Class A properties are holding up fairly well. Average occupancy remains above 92% and first quarter effective rent growth surpassed 1% for the first time since 2018. However, the availability of rent concessions has increased significantly in recent quarters.

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