Class B Apartments Outperforming All Categories

Article originally posted on Globe St. on January 12, 2024

Rent growth rose by 1.4% in 3-star properties in 2023, outperforming 4- and 5-star properties as well as 1- and 2-star, according to Apartments.com’s Q4 2023 Multifamily Rent Report.

The report defines 3-star as “B” properties, typically in garden-style.

“The demand for 3-star properties was due in large part to improved consumer confidence, lower inflation, and lack of a recession,” according to the report.

Demand for 1- and 2-star properties remained the weakest as consumers’ budgets continued to fight higher costs for housing and everyday items, pushing some to seek alternative housing solutions, such as moving in with roommates or returning to family homes, according to the report.

Comparatively, Markerr’s rent data shows that B-quality apartments outperformed their luxury A and A+ quality counterparts by ~15 bps and ~25 bps over the past year, respectively.

“That gap has shrunk by ~70 bps from the peak that was reached in 3Q23,” said its research analyst, Galen Faurot-Pigeon.

“In select markets across the country, we are seeing a resumption of rent growth as consumer confidence improves and fears of recession begin to dissipate,” Derek Graham, Principal and Founder of Odyssey Properties Group, tells GlobeSt.com.

Odyssey’s current portfolio focuses on acquiring value-add multifamily properties in 13 states and Graham reports markets such as Seattle, Tampa, and throughout the Midwest region are seeing higher occupancy and organic rent increases.

“We’re also seeing continued demand for renovated units, as well as noticeable improvements in delinquency,” he said. “I’m not sure we’ll see that same growth in the near term in the Sunbelt or those submarkets that were so severely overdeveloped.

“Recovery may take a little longer in those markets as the elevated supply gets absorbed, which many experts are forecasting will begin to occur towards the end of 2024.”

Paul Waterloo, Managing Director, Interra Realty, tells GlobeSt.com that the seven main suburban counties outside of Chicago has had a “very positive trajectory on both the rent growth and absorption fronts over the last year.

“When we last analyzed the data from Q4 of 2023, each suburban region experienced positive 12-month rent growth. Additionally, 12-month absorption across all these suburban regions was over 3,000 units.” This data, Waterloo said, has translated to persistent buyer demand in its suburban listings, which primarily consist of Class B and C multifamily properties.

“We expect this trend to continue throughout 2024, with transaction volume also increasing from that of 2023,” he said.

David Gaines, Managing Director, Capital Markets, JLL, tells GlobeSt.com that the national housing stock is structurally undersupplied long-term; since 2010, the imbalance has become more pronounced.

“While Class A units are constantly competing with new deliveries in their respective markets, Class B units remain in extremely high demand as tenants are drawn to the greater affordability of the Class B units,” Gaines said.

“Significantly declining housing affordability prolongs renter tenancy. Despite improvement in 2023, housing has become 40% less affordable over the past decade, which puts increased demand specifically on Class B units.”

On the other hand, the spread above renting remains at all-time highs after a slow summer home sales market, extending rentership nationally, Gaines said.

“Owning is currently 62% more expensive than renting nationally, hovering at all-time highs,” he said.

“This bodes well for Class A units as these renters are typically first-time home buyers and are now extending their life as renters. Additionally, delayed starts are currently 36% of total starts, compared to the 15% to 20% long-term average. This decrease in new supply bodes well for existing Class A rents, as well.”

Lastly, growth markets are in a downswing following outsized growth; however, a rebound is expected, he said.

New York, Boston, Chicago, and Miami currently lead the nation in current rent growth as the only four markets above 2% YoY growth in 2023, according to JLL.

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