Today’s apartment market is characterized by record-setting levels of demand, record rent growth for both for new leases and renewals, and the tightest occupancy rate on record. Even so, it takes rent rolls awhile to rebalance – especially after the challenging leasing environment over much of the past year and a half.
True bottom line revenue growth in some of the nation’s most expensive areas is still working to rebalance despite rapidly improving fundamentals. Even in places like New York, where 3rd quarter 2021 new lease trade out hit 18%, rent roll growth is still negative. Trade out is the change in rent from one lease to the next for the same unit.
This chart showing year-over-year rent roll growth plotted alongside an affordability proxy – in-place rent per square foot – highlights the challenges many of the more expensive metros across the country have faced in recent months relative to their more affordable peers.
Underperformance of more expensive areas during a recessionary period isn’t uncommon. As economic uncertainty increases due to job losses, renters often choose more affordable living arrangements. Historically, that may have meant moving from a Class A property to a Class B property, or perhaps doubling up with roommates to save money.
But as with every recession, the COVID-19 pandemic-driven recession was different than the recessions that preceded it. In the case of the most recent economic downturn, a rise in the work-from-anywhere trend led to significant out-migration from expensive areas and in-migration into more affordable areas.
While a few areas such as Riverside, where in-place rent per square foot stands at $1.91, are more expensive than the U.S. overall ($1.59), it’s an area that is far more affordable than its neighboring markets Anaheim ($2.50) and Los Angeles ($2.55). This provides a more localized example of a flight to affordability during the COVID-driven downturn.
Expensive Urban Areas Continue to Lag
A similar trend can be seen on a micro level when comparing submarket performance. Urban core underperformance was a key performance theme through 2020 and into early 2021. While today’s urban core rebound is fully underway, we see a similar trend in that many urban core rent rolls are still working to get to positive growth.
That trend is even further pronounced within the most expensive urban cores. Urban San Francisco revenue is down more than 10% despite the positive trade out finally occurring the area. Urban areas of Boston, Chicago and Seattle are a few other examples of significant challenges.
Only a handful of the nation’s urban cores are generating revenue growth that’s greater than the U.S. average. Many of those places – including Greensboro/Winston-Salem, Raleigh/Durham and Jacksonville, among others – also happen to have more affordable urban core submarkets than what the typical U.S. rent per square foot achieves.
Continued Rent Growth Should Bolster Rent Rolls
How long will it take for today’s excellent rent growth to rebalance rent rolls and yield revenue growth once again?
Again, at the U.S. level, revenue growth is already beginning to occur.
In fact, rent rolls have been growing since May 2021. Combined lease trade out, or rent growth on new leases and renewals, never actually turned negative, but with occupancy falling through most of 2020 the result was modest revenue loss.
Even in the gateway metros which have been laggards in the recovery there is modest revenue growth occurring once again as of September. While non-gateway metros are far outperforming with annual revenue growth of 6%, the rebound in non-gateway trade out is fully underway.
Rent growth acceleration alongside the improvement in occupancy in those areas, suggests that revenue growth will begin to pop even further by the middle part of 2022. In fact, the RealPage forecast calls for many of those gateway metros to actually see peak rent growth in 2022 while the rest of the nation’s markets have likely achieved their peak trade out some time in the past month or two.