RealPage recently held a webinar where they discussed the differences between the recent performance and the future prospects of the urban core apartment markets compared to the more suburban markets.

Inspiration for this webcast came from the widespread recent speculation that the COVID-19 pandemic had disproportionately impacted properties in the urban core. The presentation was conducted by Greg Willett, Chief Economist at RealPage, and Adam Couch, Market Analyst at RealPage.

Defining terms

For purposes of this analysis, RealPage defined “urban” areas to be densely populated and highly developed areas around the central business districts of major cities. The “suburban” areas are more affordable and less densely populated areas outside the urban core. However, “suburban” areas may still be within the city limits.

Tracking occupancy

RealPage presented information on occupancy dating back to 2011. It showed that occupancy in urban properties was significantly higher than that in suburban properties at the beginning of the period. However, urban occupancy remained at about the same level, with seasonal variations, while suburban occupancy rose. Starting around 2015, suburban occupancy exceeded that in urban areas, a trend that is still in place today.

Although occupancy has fallen in both urban and suburban areas since the pandemic started, the impact has been more pronounced in the urban areas. This is shown in the first chart from the webinar, below.

occupancy urban apartment markets and suburban apartment markets

Source: RealPage

While the chart shows the overall occupancy difference between the two regions, the occupancy difference varies by apartment class. Suburban class A and B apartments achieve higher occupancies than their urban core counterparts, but urban class C apartments actually have higher occupancy than their suburban equivalents. However, the higher prices of urban apartments mean that there are fewer class C apartments available there than in the suburbs, so the overall average occupancy for the suburbs remains higher.

Urban flight

Despite reports of people fleeing the urban core, RealPage’s analysis indicates that this is not generally true. Much of the loss in occupancy being seen is the result of young people who are experiencing unemployment moving in with their parents or with roommates. Therefore, the fall that is being observed in occupancy is not so much due to households relocating as it is to the number of rental households decreasing.

While urban flight may be overstated in general, there are metro areas where it is taking place. RealPage identifies these as expensive gateway metros. The second chart, below, identifies several of them and illustrates the extent of their occupancy losses.

occupancy changes select urban apartment markets and suburban apartment markets

Source: RealPage
Tracking pricing

In addition to occupancy, pricing changes are a key metric to examine in assessing the disparate impact of the pandemic on urban versus suburban apartment markets. RealPage presented the next chart showing the long term trends in annual changes in effective asking rents for new leases for both markets.

asking rent growth urban apartment markets and suburban apartment markets

Source: RealPage

The chart shows that rent growth has been stronger in suburban areas than in urban areas since 2013. While rent growth has fallen in both areas recently, overall rent growth has remained positive in suburban areas while it has fallen to -1.7 percent in urban areas.

Despite the years of higher rent growth in suburban areas, absolute rents remain higher in the urban apartment markets. RealPage estimated the average rent for an urban apartment at $1,955 per month while the average rent for a suburban apartment was estimated at $1,349 per month.

One key to the higher rent growth of suburban area apartments is illustrated in the next chart. It shows the average annual inventory growth rates in the two regions. The much higher inventory growth rate for apartments in the urban core since 2012 has been a factor in dampening rent growth in those markets and in keeping occupancy lower than in suburban apartment markets.

inventory growth urban apartment markets and suburban apartment markets

Source: RealPage
Looking ahead

The next chart is the most surprising of the presentation. It depicts the shares of total apartment demand supplied by the urban and suburban markets. The chart shows that the suburban apartment market is much larger than is the urban apartment market. In 2011, over 80 percent of apartment demand was provided by the suburban apartment market. In recent years, that share has fallen to around 75 percent.

demand share urban apartment markets and suburban apartment markets

Source: RealPage

While the bars in this chart always add to 100 percent, the actual total number of units being absorbed quarter by quarter could be substantially different. These figures were not provided as part of the presentation.

The chart provides a projection of future demand. It predicts that the share of total demand being supplied by the urban apartment market will rise significantly during the quarter we are now completing and during the next two quarters. This is a little surprising since the attractions of the urban environment: the clubs, restaurants, bars and entertainment, continue to be impacted by COVID-19 related shutdowns.

The next chart projects how occupancy will change through the end of 2021. It is consistent with the previous chart in that it shows occupancy rising in the urban apartment markets over the next two quarters while it continues to fall in the suburban markets. By 2021, it shows apartment occupancy returning to its usual annual cycle, albeit at lower levels of occupancy than in the recent past.

future occupancy urban apartment markets and suburban apartment markets

Source: RealPage

The final chart projects how rent growth will change through the end of 2021. It predicts that the worst is yet to come for rental housing providers, with rent growth in both urban and suburban markets turning negative by the first quarter of 2021. It does not project overall rents to increase until some time in 2022.

future rent growth urban apartment markets and suburban apartment markets

Source: RealPage

About six weeks into the pandemic, leasing activity returned to normal levels, but the leasing process has changed.

The pandemic immediately impacted apartment leasing activity, but about six weeks into the pandemic, leasing activity rebounded to normal levels. Quarantine, distance learning, and work-from-home policies encouraged people to move to more accommodating homes, driving leasing demand. However, the leasing process has changed since the onset of the pandemic, and those changes—virtual leasing—will take longer to return to normal.

“At the outset of the pandemic, as people adjusted to stay-at-home orders and physical distancing mandates across a number of U.S. states, our early data suggested a significant decrease in lead volume,” Stacy Holden, industry principal and director at AppFolio, tells GlobeSt.com. “However, after about six weeks, leasing activity largely rebounded to expected levels—there are geographic differences as the timing of the impacts of the pandemic vary, but people still want to move to places that meet their needs. In fact, one could argue that the experience of quarantining at home for so many months has led many renters to seek out their next home, eager to get a change of scenery or something better suited for their new normal.”

In addition to changes in lifestyle, like work-from-home and remote learning, which created demand for larger spaces, many people also had the flexibility to move further away from work to more affordable markets. This trend, again, drove leasing activity. “With many people having had the ability to work remotely this year, the need to live close to the office may have diminished for some,” says Holden. “Without it, it may have encouraged some people to find homes in less densely populated areas, outside of urban centers, ultimately increasing leasing demand in the suburbs and decreasing it in major cities. Additionally, urban areas that are home to many colleges and universities are seeing increased vacancies due to students not coming physically back to school this semester.”

However, it is more challenging to lease units today than it has been in the past. “Pandemic or not, vacancies will always occur. The problem is not that units are sitting on the market without movement—the demand is still there in many regions—the problem so far is that it is simply harder to move the leasing process forward in a remote reality,” says Holden. “But in any case, now is the time for property managers to prepare their operations to succeed in any market conditions.”

This change in the leasing process has been more of a disruptor than the abrupt drop in leasing activity at the start of the pandemic. “Leasing has always been an in-person process, so the shift to physical distancing is a major disruptor to the way the industry has historically converted leads into new residents,” says Holden. “This is the biggest trend in leasing during the pandemic—a monumental shift to conducting leasing activity virtually. It is also a trend that we actually anticipate remaining for the long term, given the flexibility and convenience it provides prospective residents and leasing agents alike.”
Source: GlobeSt.com By Kelsi Maree Borland | September 22, 2020, at 02:00 PM

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Washington, D.C. – The National Multifamily Housing Council (NMHC)’s Rent Payment Tracker found 86.2 percent of apartment households made a full or partial rent payment by September 13 in its survey of 11.4 million units of professionally managed apartment units across the country.

This is a 2.4-percentage point, or 279,457-household decrease from the share who paid rent through September 13, 2019, and compares to 86.9 percent that had paid by August 13, 2020. These data encompass a wide variety of market-rate rental properties across the United States, which can vary by size, type, and average rental price.

“While it remains clear that many apartment residents continue to prioritize their housing obligations and that apartment owners and operators remain committed to meeting them halfway with creative and nuanced approaches, the reality is that the second week of September figures shows ongoing deterioration of rent payment figures – representing hundreds of thousands of households who are increasingly at risk,” said Doug Bibby, NMHC President.

“This sadly comes as little surprise given that Congress and the Administration have failed to come back to the table and extend the critical protections that supported apartment residents and the nation’s consumer base during the initial months of the pandemic.

“Instead of being satisfied with a half-baked nationwide eviction moratorium which does nothing to deal with renters’ real underlying problem – financial distress – lawmakers should instead look to the successful model of the CARES Act and provide economic support to those who need it most – the tens-of-millions that call an apartment home, revitalizing the recovery at the same time.”

The NMHC Rent Payment Tracker metric provides insight into changes in resident rent payment behavior over the course of each month, and, as the dataset ages, between months. While the tracker is intended to serve as an indicator of resident financial challenges, it is also intended to track the recovery as well, including the effectiveness of government stimulus and subsidies.

However, noteworthy technical issues may make historical comparisons imprecise. For example, factors such as varying days of the week on which data are collected; individual companies’ differing payment collection policies; shelter-in-place orders’ effects on residents’ ability to deliver payments in person or by mail; the closure of leasing offices, which may delay operators’ payment processing; and other factors can affect how and when rent data is processed and recorded.

 

Source: National Multi Housing Council September 16, 2020