While performance in the nation’s Class C apartment product has historically lagged the U.S. norm, this lower grade of stock has gained significant ground during the current economic cycle, and now boasts tighter occupancy rates than its pricier counterparts.
When the current cycle started, Class C stock was at a 10-year low at 90.8%, roughly 200 basis points (bps) behind Class A and B units and well below the national average. All product lines saw occupancy increase rather quickly during the first two years of the cycle, but the Class C stock started closing the gap at the end of 2012. By the end of 2015, five years into strong economic growth, the lower product tier was essentially full and performing right in line with the middle- and upper-tier product lines. In the first six months of 2018, however, the Class C stock backfilled even more vacancies, leaving occupancy in the other two groups at least 50 bps behind.
In total, occupancy in the nation’s traditionally underperforming Class C stock has grown 510 bps during the current economic cycle. By comparison, progress was milder in Class B stock (270 bps) and the growing supply of Class A units (120 bps).
Overall occupancy in the nation’s Class C apartment stock was at 95.9% in June 2018, registering above the 95% mark for the 13th straight quarter, and recording some of the strongest readings this product line has seen in 15 years.
While most markets across the country saw their Class C product lines gain at least some ground during the current cycle, a handful of metros logged especially significant progress. The 10 with the most progress were recording Class C occupancy below 90% before the cycle started in early 2010. Now, eight years later, most are registering very few vacancies, and all but one have occupancy rates at or above the 94% mark.
Among the nation’s 50 largest markets, the metros where Class C occupancy gained the most ground during the current cycle were Memphis and Orlando. Though Memphis’ lower-end product line has grown 1,200 bps during the cycle, the mid-2018 showing remains lower than the other markets on the list at 93%. Even so, that rate is well above the historical norm for this metro’s Class C stock, which has typically struggled with weak structural drivers.
Orlando’s Class C occupancy reading is now 1,190 bps ahead of where it was at the end of 2009. Occupancy in this market’s lower-teir stock is now very tight at 98.8%, fueled in part by lower-wage jobs in the metro’s dominant tourism industry. In comparison, Class A and B product in Orlando are recording occupancy rates between 95% and 96%.
Class C stock in Jacksonville and in the big building centers of Atlanta and Phoenix also recorded occupancy increases of more than 1,000 bps since the beginning of the cycle. Atlanta and Phoenix were also among the national leaders for job growth in May.
Five markets posted Class C occupancy upturns of 800 bps to 860 bps during the current economic cycle. Columbus achieved most of the 860 bps increase in Class C occupancy early in the recovery, as the overall market has remained tight for more than three years.
Las Vegas’ Class C increase came as the late-recovery metro gained momentum recently. Steady progress boosted lower-tier occupancy in the high-development Charlotte metro, where demand drivers remain robust.
Much of the increase in the construction center of Dallas came early in the cycle, driven by strong job growth and other solid demand tailwinds. Tying Dallas’ increase was the increase in Greensboro/Winston-Salem, a lower-occupied market with higher vacancies in lower-tier product than in other metros on the top 10 list.