Is There Enough Demand For All Of These New Apartment Buildings?

Apartment demand has been rebounding since summer, although landlords have had to offer sweeter concessions to prospective tenants to get warm bodies into the large numbers of buildings that are finishing construction. The pace at which vacant apartments were absorbed fell 40% in the first half of 2020, but made up for most of that loss by the end of the year (off only 14% by year-end according to ALN). Demand was strong in the third and fourth quarter, and the recovery still appears to be sustaining itself into 2021 so far. Unfortunately for building owners, the number of new market-rate units that got completed in 2020 hit nearly 345,000 according to RealPage, which is the largest number of deliveries since the mid-1980s, and another 404,000 are supposed to get completed this year. The biggest increases in construction completions are coming in the coastal gateway markets that have already been seeing net move-outs.

There is a huge difference in apartment performance in the Sunbelt and in the gateway cities. Absorption has been strong in Dallas/Fort Worth, Atlanta, Houston, Phoenix, Denver and Charlotte, but New York and San Francisco have lost tenants in large numbers.

The steepest rent declines have been in the luxury product sector, as existing Class-A properties are having to reduce pricing to hold onto the renters who or seeking

more affordable housing options. Some tenants have been shopping around for the best move-in specials, to get a couple of months of free rent.

Operators of Class-A buildings are struggling to retain tenants. New units tend to be leasing slowly in markets where a lot of buildings have just opened for lease. As a result, new buildings are offering sizable rent discounts that are drawing households out of the stabilized Class-A stock.

Retention rates were extremely high during the summer, but have moderated substantially since then. This is especially true in New York and San Francisco. They’ve lost households to more affordable parts of the country and some of the renters that remain are bouncing around from one property to another in order to take advantage of discounted prices for new-resident move-in specials. For the nation as a whole, resident retention when leases expired came in at roughly 51% at the end of 2020 (data courtesy of RealPage). The number was far weaker in the Class-A buildings, at 45%.

The weakest-performing metros have seen retention rate for Class A renters dip as low as 30% to 35%. And, there are some people who have moved out of their in-town apartment in favor of a detached single-family rental in the suburbs, with more space for their home office and their dog.

What is the outlook for Class-A apartments in the intermediate term? I think the “concession-shopping” behavior is a short-term phenomenon, and that Class-A buildings, particularly those in suburban locations, will see a significant improvement in performance over the next 24 to 30 months. There will be continued weakness this year because of the large chunk of new supply that will reach completion, but looking farther ahead, into 2022 and 2023, I expect the apartment market to tighten up again. In the Sunbelt markets, particularly in Florida, Texas, Arizona, Nevada, Georgia, and the Carolinas, I’m anticipating a significant improvement in rental market conditions two years out.

This post first appeared on Forbes.com. To see the original, click here.