There’s a great disparity in apartment rent growth between major metros and secondary markets, and the caliber of recent supply is to blame.
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U.S. rent growth has slowed for four consecutive months, with markets like San Francisco, New York and San Jose cooling the most.
There is enough demand to absorb current supply, Yardi Matrix department of operations manager Doug Ressler told Bisnow, but the apartments coming online fall within the upper end of the spectrum, and that’s not where the demand is.
“This has been typical for years. No one builds Class-B/C’s, they all build Class-A's,” Ressler said. “So you’ve got this great divide where the demand is just growing significantly in the B and C categories. It has diminished somewhat for luxury apartments but not a great deal.”
Secondary Markets, Value-Add Apartments
Cities on the West Coast are leading the country in rent increases, according to Yardi Matrix, but it’s not where you may think. Sacramento and Stockton are seeing an in-migration of renters fleeing San Francisco’s high-rent environment, moving to more affordable Class-B and Class-C buildings that have been upgraded.
“In Sacramento and East Bay you’re seeing a tremendous amount of these affordable rental units where people are saying, 'I cannot afford San Francisco, but I can take the metro rail or BART [and move where] I can afford rents further east,'” Ressler told us.
As demand increases for affordable housing in suburban markets, new apartments remain luxurious in outfit and price. In 2015, 75% of all large rental developments were high-end.
One way developers are attempting to resolve this imbalance — though it’s a mere Band-Aid on a large open wound — is by purchasing older apartments and giving them a facelift. Typically this requires less money and the profits far outweigh the initial capital injection as developers add amenities that allow them to increase rents.
“Value-add says, I’ll take an apartment that has good bones, meaning good architecture, and is maybe 20 years old, and I’ll invest a small amount — maybe five figures — into that apartment so I can continue to grow the rents,” Ressler said. “There may be a tremendous number of those that will resurge in 2017, especially in places like Miami.”
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