Apartment Performance Splits Between Gateway Markets and Neighbors
A prevalent theme through the ongoing recession is weakening performance among the expensive, coastal gateway markets. Essentially every key metric shows underperformance among these markets. Occupancy has plummeted, and rents are falling in tandem.
But perhaps the most perplexing trend surrounding these coastal markets is that their neighboring metros – oftentimes secondary markets that are far more affordable – are maintaining a lot of strength in comparison.
RealPage examined performance among seven major coastal markets and their closest neighbors and found that the performance difference is staggering. In October, metros neighboring these coastal markets logged occupancy more than 2 percentage points higher and maintained a nearly 11 point advantage in rent change in the past year.
This October delta is the largest since March. The performance gap has widened as the pandemic has lingered. COVID-19 and its effects on the economy has progressively eroded performance among expensive coastal markets in most months since the initial U.S. outbreak. Neighboring markets, however, managed to pull out of the initial downtrend sometime this summer, and in many cases, have returned to growth mode.
Why is this split occurring between markets in such close proximity? One potential cause is that many residents – whose employment situation allows – have moved out of more expensive markets and into more affordable but still close-by markets as the nation’s economy stabilizes.
While tracking migration patterns since March is nearly impossible, there are a few proxy metrics that can at least help support the argument.
Consider the average rental rate in the above coastal markets. In every instance except Los Angeles and neighboring Ventura County, the gap in average monthly rents is massive.
Savings of $300 and all the way up to $900 per month may very well entice residents who aren’t getting the same big city lifestyle experience they were prior to COVID-19. As local nightlife is shutdown and major employers are generally lenient on work-from-home policies, an additional few hundred dollars per month for a big city apartment may be hard to justify for some renters.
Still, higher rents, disappearing lifestyle advantages and the decreasing benefits of proximity to work are a potential cause of underperformance, not the effect. Looking at metrics that might indicate the effects of the out-migration really shows the performance gap.
Arguably the biggest and most direct effect on these markets relates to occupancy.
As of October, the coastal gateway markets all underperformed their nearby peers in terms of occupancy. In some instances – such as Boston and the Bay Area – those occupancy differences were north of 3 points. The Bay Area-Sacramento spread is particularly noteworthy, because over the past decade, the Bay Area’s occupancy averaged a 0.7 point higher than Sacramento’s. On the East Coast, Manchester/Nashua has slightly outperformed Boston (0.2 points) historically, but is well ahead in the COVID-19 era.
Looking at year-over-year occupancy change underscores these occupancy shifts.
Among the seven coastal gateway markets examined, all but Anaheim have lost occupancy over the past 12 months, with losses ranging anywhere from 1 to 2 points. But their neighboring peers have all benefited, likely at the bigger markets’ expense.
Riverside is the most drastic example, as that market is likely receiving people who are moving from both Los Angeles and Anaheim. Riverside rents are about $500 to $600 more affordable than Los Angeles and Anaheim. In fact, a Class A apartment in Riverside rents for $180 less than a Class B in Los Angeles. Additionally, two-bedroom units in Riverside rent for $10 less per month than an efficiency in Los Angeles – and more than $300 less than a one-bedroom unit. More square footage is particularly attractive for many who are needing home office space while working from home.
When occupancy falls – or even more simply stated, when demand falters – rents also slide.
Take a look at New York and Long Island, where a strikingly similar economic story is unfolding. Job losses in the year-ending September 2020 in New York are among the nation’s largest. During that period, the employment base has contracted more than 11.5%. Meanwhile, Long Island has been hit similarly hard with more than 8.6% job loss.
But growth in effective asking rents remains positive in Long Island at slightly under 2%, despite a harrowing economic backdrop. Comparatively, effective asking rents in New York are down more than 13% over the past year. That drop in rents is surpassed only by cuts in San Francisco and San Jose.
And despite those drastic rent cuts in New York, Long Island’s average rent ($2,433) is still well below the $3,157 rents commanded in New York.
Packaged altogether, the story is telling.
Every major gateway market is experiencing negative revenue change in the year-ending October 2020. Those losses – determined by annual occupancy and rent change at the market level – range from a modest 0.9% in Anaheim to a ghastly 14.4% in New York. Meanwhile, every neighboring gateway market is seeing positive revenue change.
And when taken as a difference (neighbor markets minus gateway markets), the revenue results vary anywhere from 8% to 21%.