Everyone Loves a Comeback Story, Especially Apartment Owners

Article originally posted on CoStar on March 29, 2021

With apartment rents up more than 4% so far this year, Austin is one of the biggest comeback stories in the country. (Getty Images)

One of the biggest stories in the multifamily sector over the past year is the divergence in rent growth trends by region, neighborhood and bedroom type. Previously, CoStar analyzed the best and worst regions of the country for multifamily rent growth since the coronavirus pandemic began.

However, roughly one year into the public health crisis, looking solely at year-over-year or quarterly rent growth obscures the initial rent drop as well as the recent rent increases.

Nationally, multifamily rents are up roughly 1.5% since the third quarter of 2020. While this is a modest figure, it represents a sharp turnaround compared to the months immediately following the onset of the pandemic, when rents fell and then remained flat.

The recent rent increase is welcome news for apartment owners, many of which were forced to freeze or lower rents in the early months of the pandemic. However, it’s also important to realize that millions of renters signed leases in the early months of the crisis, when asking rents were plummeting and concessions were more prevalent. These renters may face some sticker shock when they receive their renewal notices, as some areas showed significant growth since the pandemic trough in the third quarter of 2020.

In order to identify the areas where this sort of sticker shock might be most prevalent, CoStar took a look at year-over-year submarket rent growth as of the third quarter to illustrate the initial drop in rents, and compared that to rent growth during that time to measure the bounce back that some areas have seen. Submarkets in the top left quadrant are those where rents were down on a year-over-year basis in the third quarter, but rents have increased since then.

The biggest comeback story is Austin, Texas’ South Central district, a largely residential submarket that has quickly become one of the the city’s hottest areas. Rents were down more than 7% on a year-over-year basis as of the end of the third quarter 2020, but are up nearly 9% since then with the submarket’s year-over-year rent growth now slightly positive. The area is just south of Downtown Austin, and many residents living in the South Central submarket work downtown. Now that urban amenities such as bars, restaurants and music venues are beginning to reopen in earnest, landlords are pricing the premiums for those built-in amenities back into nominal asking rents, generating sizable growth in overall rents.

It’s a similar turnaround in Old Town Scottsdale in Phoenix, where rents have been on a roller coaster ride over the past few years. Annual rent growth in Old Town Scottsdale peaked at nearly 12% as of the first quarter of 2019 before turning slightly negative immediately after the onset of the pandemic last March. But after sustained weakness through the third quarter of last year, rents have skyrocketed in Old Town Scottsdale and are up more than 7% since the third quarter.

Other areas with strong bounce backs include West Palm Beach in South Florida and North Fulton in Atlanta — two highly desirable areas in fast-growing regions where rent growth was notably weak early in the pandemic before rising significantly over the past few months.

Even some of the nation’s hardest-hit apartment markets are starting to claw back some of their rent losses. The South of Market neighborhood in San Francisco, for example, posted rent losses that exceeded 20% year over year as of the third quarter, though rents have trended upward slightly since then. It’s been a similar story for other hard-hit areas such as Downtown Boston and Downtown Seattle, which have moved slightly in the black since the third quarter of last year.

Moving clockwise in the graph above, the top right quadrant represents areas where annual rent growth was positive as of the third quarter of 2020 and has continued to rise since then. Submarkets such as Southwest Riverside County-Temecula and Greater Ontario-Rancho Cucamonga, both in California’s Inland Empire, posted impressive rent gains during the early months of the pandemic, and landlords have continued to push rents at an accelerated pace in recent months.

Only a few locales land in the bottom right quadrant, representing areas where annual rent growth was positive as of the third quarter but have fallen since then. Most markets are close to the pack in this quadrant.

Lastly, on the bottom left of the chart sits the areas where annual rent growth was negative as of the third quarter and have continued to trend downward. Though not an enviable sector to be in, the pace of rent declines in most of these locales has slowed compared to a few quarters ago.

Most of these areas are in cities at the bottom of the rent growth leaderboard, such as the Northern California markets of San Francisco, San Jose and the East Bay, as well as New York, Seattle and Washington, D.C.

Topping the list for largest rent declines since the third quarter is Downtown Oakland, where the influx of new supply, coupled with the lingering effects of the pandemic, continue to push asking rents lower.

Rents in North Hudson County, which is in New Jersey but falls within the New York metropolitan area, have continued to fall over the past few months as well. This is contrary to the overall New York region trend of relatively stable rents after the initial COVID drop, perhaps signaling that renters are ready to return to Manhattan. And rents in perennial developer favorite Southwest-Navy Yard in Washington, D.C., are trending downward, as the area is contending with 4,000 units, or more than one-quarter of its existing inventory, coming on line over the past 12 months.

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