Examining the Urban-Suburban-Outlying Divide in 2021

The June edition of the ALN monthly newsletter was a look at how properties across the urban-suburban-outlying geographic divide had performed through the first five months of 2021. With last year now in the rear view mirror, but with a couple of days until complete January data is available, now makes a perfect time to revisit the topic. In this case, we will broaden the time period to consider all of 2021 compared to recent years.

Methodological Notes

As usual, the included statistics will refer only to conventional properties of at least 50 units. ALN delineates  markets using complete metropolitan statistical areas (MSAs) as defined by the Census Bureau. A market may include only one MSA, or multiple. Within an MSA, areas are defined as Urban, Suburban, or Outlying based primarily on population density per square mile.

Urban Regions

New supply in urban areas around the country increased in 2021 despite persistent challenges to construction. More than 180,000 units were introduced which is more than in either of the previous two years. In the face of an active construction pipeline apartment demand was more than up to the challenge.

Around 360,000 net previously unoccupied units were leased during the year, which was more than the total from 2019 and 2020 combined by a solid margin. These net absorbed units represented approximately 45% of available units to be leased. This too was considerably higher than in previous years.

The total effect of the new supply and apartment demand for urban regions was a recovery in occupancy from a lower than usual level to begin the year. A 3% gain brought average occupancy to just below 94% to close 2021 – the highest point to end a year in recent history.

Urban region average effective rent rose by about 15% during the year after a decline of just less than 1% in 2020. This annual gain was more than three times larger than in the pre-COVID 2019 period and was essentially tied with the increase seen in outlying areas for the highest 2021 total.

On an average net rent per unit basis, southern growth markets posted the largest annual gains last year for urban portions of the market. Tampa, Orlando, Austin, and Phoenix were atop the list, but Boston also managed to crack the top five thanks in part to a dramatic increase in average occupancy of nearly 15% during the year. San Francisco – Oakland, Minneapolis – St. Paul, and New York struggled relative to the rest of the county, though the urban portion of each added between 6% and 7% to average net rent per unit.

Suburban Regions

Suburban new supply totaled roughly 60,000 delivered units in 2021, also an increase from both 2019 and 2020. The Dallas – Fort Worth market added nearly 10,000 new units in this category alone, the most of any market.

As with the urban regions, net absorption of almost 100,000 units was more than the 2019 and 2020 totals combined, but not by quite as wide a margin. Net absorbed units represented more than 40% of units available to be leased, and as with the urban regions, this was markedly higher demand than in previous years.

Suburban average occupancy did not face the same struggle in 2020 as in urban areas, and new units in these areas equaled roughly the same percentage of existing units as in the urban regions. With a stronger starting point and generally proportional new supply, average occupancy did not increase to the same extent. A gain of just under 2% brought the average for suburban areas to almost 95% to end 2021.

Average effective rent appreciation of about 13% was the lowest of the three geographic groups for 2021, an indication of just what an unusual year it was for the multifamily industry. The gain was well above the 2019 value, but for suburban areas, it followed a 2020 in which average effective rent was essentially flat rather than having suffered a decline.

Familiar markets such as Tampa and Austin were leaders in net rent per unit growth last year for suburban regions. Other markets like Dallas – Fort Worth, Atlanta, and Seattle filled out the top five. Each market entered 2021 with relatively high average occupancies, so the annual gains were more due to average effective rent appreciation ranging from 24% to 30%. On the other end of the spectrum, Minneapolis – St. Paul, Washington DC, and Cleveland lagged relative to other markets, but only the Twin Cities failed to reach 8% in average net rent per unit growth.

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Outlying Regions

This lowest-density category added approximately 45,000 new units last year. This level of new development was about equal to 2020 and a little higher than in 2019. The outlying portion of the Las Vegas metro area led the way, followed by Dallas – Fort Worth and Orlando.

Net absorption of about 75,000 units was almost 40% higher than in 2020, but thanks to strong apartment demand in this segment during 2020, this group was the only one in which 2021 net absorption was not more than in the previous two years combined. Absorbed units as a percent of available units was nearly 50%, the highest of the three categories and a reflection of the sustained demand in these areas experienced throughout last year.

This group entered 2021 with the highest average occupancy, and an annual gain of right around 2% brought the average to over 95% to end the year. As with the other groups, this was the highest average occupancy to end a year of the last three.

Outlying area average effective rent rose by 15% in the period. At the risk of sounding like a broken record, this was more than triple the gain from 2019. A difference from the other two segments was that the 2021 appreciation followed an increase of more than 3% in 2020.

Once again, some familiar markets populate the top of the list for annual average net rent per unit. Tampa, Orlando, Phoenix, and Austin were joined in the top five by San Antonio. Each of these metro areas have notable expansion occurring in some outlying submarkets, something that certainly helped to fuel net rent growth. Dayton, Minneapolis – St. Paul, and New York trailed other large metros – though Dayton still managed a 10% jump in average net rent per unit.

Takeaways

As discussed in our most recent Takeaways video, one of the major themes of 2021 for multifamily was the broad-based nature of the strong results. This was displayed across markets, across the price classes, and across the urban-suburban-outlying divide.

One difference in the context of the 2021 results was the state of each group coming into last year. The urban areas struggled most in 2020, with suburban areas as a group largely holding serve, and outlying areas performing quite well.

Another observation from the data is that the growth markets across the south that did so well in 2021 did well across the board with regard to this density perspective. Similarly, markets that lagged relative to the rest of the country such as the Bay Area in California or the Twin Cities did so generally across the board.

Finally, apartment demand was so incredible last year that it was able to power historic results throughout the multifamily industry regardless of segment. There were tailwinds to that demand, from eviction moratoriums to stimulus programs to artificially suppressed demand in 2020 that will not continue through 2022. There are also new challenges this year including foreign affairs, inflation, changing monetary policy, and continued uncertainty around the COVID-19 pandemic. Even so, the multifamily industry appears well-situated to deal with these potential issues and 2022 should be another interesting year.

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