Top 10 Stats Capturing Today’s Crazy Apartment Market

For most of us in the multifamily housing business, 2020 felt like a crazy year. And 2021 feels like another crazy year. But this time, it’s a good kind of crazy – so far.

Here are our top 10 stats best capturing the “good crazy” of the U.S. apartment market as we near the mid-year point of 2021. This is a summary from our recent webcast, which is available on demand here.

We’ll count them down from #10 to #1.

#10: Concession Usage Peaked in COVID era at Just 16.8% of Units

Rental concessions continue to generate a lot of media and Wall Street buzz, but they’re decreasingly utilized. That peak of 16.8% of vacant units offering discounts occurred in May 2020 (excluding lease-ups, where concessions remain more common), and giveaways have lessened since then. For comparison, going back to the recession of 2008 and 2009, use of concessions spread to 54.7% of the available product.

Why are concessions going out of style? A few reasons. Occupancy held up better in 2020 compared to 2008 and 2009. The use of revenue management is much more common today, with revenue management systems have ushering in a shift toward effective pricing and away from free rent. And concession costs typically outweigh the benefits.

Concessions prolong the pain and delay the recovery. To that point, the markets where discounts were most widely available – San Jose and San Francisco – are the two markets that still recorded negative lease-over-lease rents on new leases as of May. In the hotter-demand Sun Belt, Houston is Exhibit A. Concessions were more common there, and of course, Houston trails other Texas markets in the 2021 rebound.

#9: Apartment Payroll Expenses Are Flat Year-Over-Year

Apartment payroll expenses are flat year-over-year, comparing 1st quarter 2021 to the same time last year. How can that be? Salaries are going up. It’s hard to find good leasing agents and maintenance technicians. And when you do, you’re paying more to get them or keep them. So how can payroll expenses be flat?

Apartment property management companies are getting more efficient. Some of that is unintentional – we have too many open jobs. And some of it is intentional – COVID forced or inspired many property management companies to find more efficient and effective ways to manage on site by leveraging new technology like virtual leasing and tours and around vendor management, accounting and payments. We’ve also seen more property managers experiment with multi-site leasing teams.

#8: Apartment Occupancy is Nearing All-Time Highs

Occupancy hit 96.1% in May. That is the highest May rate on record. Furthermore, it’s also very close to the all-time highs of 96.3% back in Fall 2019 and 96.5% in the tech boom days of late 2000.

Occupancy, of course, is seasonal and typically peaks at the tail end of the prime leasing season in August or September. That tells us there’s still some room for occupancy to climb this year, and we could set new all-time highs in the next few months.

We’re hearing from property managers who say they have virtually no availability in certain metros. To see this happening now is pretty remarkable when you consider that today’s job count is still close to 5% under its pre-pandemic high, and when new apartments are being delivered at the highest levels seen since the 1980s.

#7: Apartment Lead Volumes Grow for 55 Consecutive Weeks

Leads are prospective renters who show interest in leasing, measured through guest cards. Some call it traffic. Now, you wouldn’t be surprised to hear lead volumes this year in March, April, May or June surpassed 2020 levels. But 55 consecutive weeks? That means lead volumes in the second half of 2020 consistently topped the levels seen in 2019 – which by the way, was a big year for apartment demand.

The sustained momentum is remarkable, and it helps explain why occupancy rates are so high and why new lease rents are going up.

#6: Resident Retention Rates Plunged 360 Basis Points

Normally, a retention drop-off of that size would raise red flags. But in this case, it’s good news. Retention rates skyrocketed to record highs in 2nd quarter 2020 when renters couldn’t or wouldn’t move due to lockdowns. Retention has dropped off since then, registering at 55.3% in May 2021, which is still high by historical standards.

There are a few reasons that retention is falling. In big gateway cities and in some downtown areas elsewhere, low demand during the pandemic spurred deep rent cuts on new leases. Operators in some markets shot themselves in the foot by pricing new lease rents well below renewals, thereby incentivizing their existing renters to shop around and triggering a game of musical chairs between apartments in the same neighborhoods.

Additionally, re-opening economies and the returning jobs market is leading to more migration. That is perfectly normal and a good sign of the rebound. Ultra-high retention is never the goal, particularly in a high-demand market when new leases are priced well above renewals. To that point, renewal rents grew only 4.1% in May, about 50 basis points below the pre-pandemic norm.

#5: Average Vacant Days Between Leases Hit Record Low of 21

Average vacant days is the length of time between a lease expiring and a new lease starting in the same unit. The number dropped to 21 in May. That is stunningly low. The decade average is 26. For the month of May specifically, we’re typically around 24.

In that period of time, property managers have to make repairs or upgrades. Often there’s paint and carpet work done, cleaning and of course, marketing and leasing the unit. Labor and materials are tough to pin down right now, so it’s remarkable that property managers are currently able to move so quickly and provide housing for the large numbers of households needing places to live.

#4: Lease-Up Volumes Surging to Highest Levels Since the 1980s

Even though developers are having to scramble to get new projects across the finish line, we still appear on track to add around 400,000 market-rate units this year. That’s the biggest new supply volume seen since the 1980s. By comparison, developers completed 340,000 units last year – and that already was the high mark for this cycle.

For apartment demand to surpass multi-decade highs in supply, that’s a remarkable sign of strength.

While some had expected that construction starts would slow notably in 2021, we were never in that camp. And it’s looking like we were right. There were about 371,000 multifamily units permitted in the year-ending April. That’s off only about 5,000 units from the number seen one year prior. Money sources still view the apartment sector as a preferred option for capital deployment.

#3: Apartment Sales Through April Reach 95% of 2019’s Record Pace

And speaking of investors, they’re hungry for apartments. the most recent data available from our partners at Real Capital Analytics, a total of $48.3 billion in apartments traded hands year to date through April. That’s back to 95% of the levels reported in 2019, which set the all-time high mark for apartment sales. It’s not totally crazy to think we might set a new record in 2021.

The sales that are occurring aren’t discount sales. We heard a lot last year about buyers waiting out sellers to scoop up bargain deals, but distress sales and bargains remain very rare. Cap rates have actually compressed 40 bps since the end of 2019, according to RCA.

One other point on sales. What makes 2021 different from 2019 is the composition of what is selling. In past years, big coastal markets and trophy assets in downtowns comprised a big piece of the pie. Those assets are generally less liquid in 2021 as more investors target the Sun Belt and the suburbs. There’s still a discount to acquire these types of deals relative to gateway cities, so it’ll take more total transactions to match 2019 sales volumes.

#2: Apartment Renter Incomes Jump to Record High of $68,628

The median household income for market-rate apartment renters signing new leases reached a record high of $68,628 in May. That’s up significantly year-over-year … but since last May was a bit unusual due to lockdowns, we should probably take a more conservative measure. Compared to May 2019, incomes are up 7%. Bear in mind these numbers reflect only incomes at the time of lease signing.

Any time we talk about renter incomes and affordability, we need to also add a disclaimer. These income trends reflect renters of professionally managed market-rate apartments. Households with the lowest incomes typically do not live in market-rate rentals, and there are real challenges for those who make less than $30,000 or so annually as there’s a severe shortage of designated affordable housing. It’s important to be sensitive to that reality, while also noting that market-rate renters are typically in much stronger financial shape.

#1: True New Lease Rent Growth Surges to All-Time High of 11%

Lease-over-lease rents on new leases surged 11% in May. That is an incredible number – by far the highest we have on record. Lease-over-lease trade-out, or replacement rents, reflect the change in rents from the previous occupant’s lease to the new one. The highest new lease rent number over the last cycle was 7.1% in June 2015. Of the nation’s 50 largest metros, 32 reached double digits in May 2021.

Unlike the traditional effective rent growth measure, trade-out is a seasonal stat, and we typically see the peak in May or June each year. So, we might peak a little higher in June, but we expect some modest softening later in the summer. But that would still be very high compared to historical standards.

The more traditional measure of rent momentum is change in effective asking rents – the list price minus the impact of a concession, if a discount is offered. Effective rents jumped 4.2% year-over-year in May.

We’ll likely see that number climb higher over the next few months as effective rents catch up with trade-out rents. We’ll likely top the previous cycle high of 5.4% set in September 2015. The all-time high was 7.5% set in 3rd quarter 2000. That mark is further out but still potentially attainable – particularly if we finally get some real price acceleration in the big coastal markets like New York, the San Francisco Bay Area and Los Angeles, which are pulling down the national average.