Rental Market Slowdown Could Hit Class A Hardest
COVID-19 could further cool already slowing demand in the rental market, impacting luxury communities the most, according to a report.
After a decade of growth in the number of high-earning renter households, the impact of the coronavirus outbreak could cause that number to stall, leaving owners of luxury rental properties struggling to lease apartments.
According to research from the Joint Center for Housing Studies at Harvard University, while the length of the pandemic is still uncertain, there are early signs that point to a slowdown in demand in the U.S. rental market. Leasing activity is down at a time when apartment completions are approaching a 30-year high and the growth of renter households has slowed.
The number of Americans renting boomed between 2004 and 2016, with average annual increases of 846,000 households per year. Rental demand started to recede in 2017 and 2018 but picked up again last year. However, the number of new renter households was less than 400,000 in 2019, well below gains from the boom years.
As unemployment has continued to hit record numbers—26.5 million as of April 23—households with reduced incomes “could suppress household formations that have driven new rental demand in recent years,” Research Associate Airgood-Obrycki wrote in a post on the Joint Center for Housing Studies’ Housing Perspectives blog.
For multifamily, that means communities at the high end of the market could feel the most impact from the COVID-19 pandemic that has brought the U.S. economy to a grinding halt.
“Class A properties, which tend to be newer and higher-quality apartments, will likely take the biggest hit from slowing demand,” Airgood-Obrycki wrote. “New units with high asking rents, which tend to have lower absorption rates to begin with, might have especially low occupancy rates.”
As a result, owners of high-end properties will likely offer rent discounts or concessions in order to bring in more residents.
“The expectation is maybe a month or two of concessions for Class A properties,” Airgood-Obrycki told Multi-Housing News. “It likely depends on the market and what happens with demand.”
Rent Growth’s Historic Run
Demand for luxury rentals has been strong over the last decade and construction of Class A properties has kept pace. The segment not only has had strong demand, it’s also been the class that’s easiest to pencil out. With the cost of construction having risen rapidly over the last 10 years, it’s difficult for many developers to build at any other price point.
Rent prices in the U.S. have been growing for a record-breaking 30 consecutive quarters, with rents growing by more than 3 percent each quarter over the last 22 quarters, according to the report. But slowing demand and high numbers of newly completed units could spell the end of the rent growth streak.
“Property owners may need to lower rents, at least temporarily, or risk having unfilled apartments,” Airgood-Obrycki wrote.