Leasing activity in the nation’s top-tier apartment properties has picked up notably during 2021, resulting in tighter occupancy and climbing rents.
Occupancy in the Class A product stock improved to 95.5% in May. That’s the strongest occupancy rate seen for this segment of the nation’s apartment inventory since October 2019, and it’s a big jump from June 2020’s low-point performance of 93.9% occupancy. On average, occupancy in Class A properties ran right at the 95% mark over the course of the past decade.
What’s happened with luxury product rents is perhaps even more impressive than the bounce in occupancy.
Effective asking rents for Class A units are now rising at a year-over-year pace of 4.7%. Annual change was in negative territory from May 2020 to March 2021, with the loss getting as steep as -3.2% in September of last year. Luxury product rent growth averaged 3.1% annually during the past decade.
Today’s average rents for Class A apartments register at $1,862 a month, or $2.06 per square foot.
How Did We Get Here?
While aggressive new product deliveries in 2021 were expected to yield a competitive leasing environment in the Class A apartment category, robust leasing at the market’s new additions is leading to better-than-anticipated occupancy and rent growth.
Properties going through initial lease-up are moving an average of 25 to 30 units per month in most metros and often even more than that in high-demand Sun Belt locations like Dallas-Fort Worth, Phoenix, Atlanta, Austin and Charlotte. Monthly lease-up rates have doubled from the sluggish levels seen in 2020.
That demand momentum for new completions is allowing operators of properties in lease-up to keep use of rent concessions under control. Furthermore, most Class A properties with stabilized occupancy at this point aren’t even trying to match the rent giveaways offered at the new deliveries.
A drastic reduction in the amount of time a Class A unit sits vacant when there’s resident turnover is building confidence in pricing power. Stabilized (not new supply) luxury apartments that were leased in May had been vacant for an average of only 20 days, down from a peak 29 days of vacancy between leases in this product set during late 2020.
Demand from Affluent Renters Looks Good
While a portion of the nation’s populace has faced severe financial hardships during the past year, the higher-income households who can afford Class A apartments generally have fared well.
Those who make the most money tend to have the types of jobs that readily converted to work-from-home mode, so employment loss among those households was comparatively limited. In fact, job counts in high-paying employment sectors like Professional Services, Finance and the tech-heavy Information category are close to or even above pre-pandemic levels in many metros.
Furthermore, spending options for experiences like traveling and eating out were limited to some degree over the past year, so affluent households generally got even wealthier.
Individual lease transaction information from projects using RealPage’s property management platform shows the median annual income for a household leasing a Class A unit in May was at $93,000.
While job creation in high-paying employment categories appears to be the biggest influence on demand for luxury apartments, there’s likely also some impact from soaring prices in the for-sale housing sector. With declining inventories pushing up for-sale home prices, fewer renter households are financially qualified to buy, and those who can afford to purchase are struggling to find available product.