Metro Boston’s average effective asking rent for an apartment hit $2,458 in July, getting back to pre-pandemic pricing 16 months later.
July’s rents likewise returned to March 2020 levels in both Washington, DC, now at $1,849, and Seattle, averaging $1,945.
Effective asking rents have now fully recovered in a half-dozen gateway metros since prices hit pre-pandemic levels during June across Chicago, Los Angeles, and Northern New Jersey’s Newark-Jersey City area.
Typical month rents for July stand at $1,637 in Chicago, $2,403 in Los Angeles, and $2,044 in Newark-Jersey City.
There’s Work to Do in the Bay Area and New York
Effective asking rents are just a hair-off early 2020 results in Oakland, now at $2,381, and New York, now at $3,550. It’s likely that pricing will get back to pre-pandemic levels in either August or September.
It will take longer for full rent recovery in San Jose and San Francisco. Note that San Francisco rents of $2,991 are still about 13% off March 2020 rates. The hole left to fill in remains deeper than the drop was back when performance was at its worst in Boston, Washington, DC, Seattle, Chicago, Los Angeles, Northern New Jersey, and Oakland.
Apartment demand rebounded in the nation’s gateway markets in the 2nd quarter, after fundamentals in these regions suffered throughout much of the past year.
U.S. apartments saw a burst in renter demand in the 2nd quarter of 2021, logging higher absorption than the nation has seen since RealPage began tracking the market back in the early 1990s.
While the Sun Belt markets – areas that have proven resilient throughout much of the COVID-19 pandemic – accounted for a sizable portion of the nation’s recent demand comeback, gateway markets also logged notable apartment absorption. This recent performance in gateway markets countered the declines these more expensive markets saw throughout much of the past year when deep job losses and population declines resulted in rising vacancy rates and price-cutting measures.
Los Angeles/Orange County
The California market Los Angeles/Orange County absorbed over 12,000 apartments in the 2nd quarter, marking the second strongest showing in the nation, after only Dallas/Fort Worth. This quarterly tally accounted for roughly half of the annual demand volume of over 23,880 units, the nation’s third-best performance after Dallas/Fort Worth and South Florida. This recent performance in Los Angeles/Orange County was quite a turnaround after this region logged annual net move-outs in 2020’s 2nd and 3rd quarters, as the job base dwindled and residents left the area for less pricey locales. At the same time, construction levels remained elevated in this area, especially in the Los Angeles urban core.
Solid 2nd quarter demand made up for previous losses, pushing occupancy in Los Angeles/Orange County to 96.6% as of June, a rate that is back in line with the national average after falling to a low of 95% in June of last year. Apartment operators responded to rebounding occupancy by pushing rents by 3.5% in the year ending June. While still only rising at about half the level of the national norm, rent growth in Los Angeles/Orange County is quite a change from the price cuts that got as deep as 5.1% not long ago in October of 2020.
Chicago absorbed over 10,000 apartment units in the 2nd quarter, making up for some net move-outs seen earlier in the pandemic and taking annual demand to over 7,300 units. Apartment occupancy climbed 110 basis points (bps) in the past year to stand at 95.6% in June. While still behind the national norm, that is the strongest performance Chicago has seen since August of 2019. In the year ending June, effective asking rents grew 2.3%. While this performance was still well behind the national average, it was the first time Chicago saw the return of rent growth since annual price cuts started back in May 2020.
Washington, DC absorbed over 8,100 apartments in the 2nd quarter, accounting for most of the market’s annual demand volume of over 9,750 units. While apartment demand here never did fall into negative territory, it did fall well behind concurrent completion volumes, which are some of the most aggressive nationwide. Occupancy has rebounded slightly, hitting a few ticks ahead of the five-year average at 95.8% in June. While annual rent growth in Washington, DC seems insignificant at just 0.1%, this was the first time price increases returned after rent cuts were the norm for this market since May 2020.
The three Bay Area markets of San Francisco, San Jose, and Oakland logged sizable quarterly demand for 7,920 units, making up the bulk of annual demand of 8,380 units. The return to solid demand was especially significant for the Bay Area, which was one of the worst-suffering markets during the deepest declines of the COVID-19 pandemic. At its worst, annual net-move-outs in the Bay Area got as deep as 5,530 units in 2020’s 3rd quarter. The return of positive demand pushed occupancy up to 95.1% in the Bay Area in June. While that figure is a bit behind the region’s five-year average, it is well ahead of the low point of 93.6% logged as recently as February 2021. The Bay Area is one of only a handful of regions in the nation where rent change has not made it back to positive territory just yet. Prices were cut 5.9% year-over-year as of June, though that is notably better than the double-digit rent cuts the region was seeing just a few months ago.
New York – another expensive gateway market where apartment fundamentals were hard-hit by the COVID-19 pandemic – saw a significant rebound in demand in the 2nd quarter when over 7,000 apartment units were absorbed. While healthy quarterly demand made up for some of the net move-outs seen earlier in the pandemic, however, annual absorption remained negative, with a loss of over 25,000 units, on the net. While demand boosted occupancy to 95.9% as of June, well ahead of the low point from February, this rate was still 100 bps below the year earlier showing. Thus, New York is the only major market where occupancy is still down year-over-year. Rents are also still being cut on an annual basis as well, but cuts of 8.4% are much better than the annual declines that got as deep as 15% not long ago in March 2021.
In the April-June time frame, Seattle absorbed nearly 5,900 apartment units, accounting for a sizable portion of the 7,260 units of demand seen in the year-ending 2nd quarter. This annual showing was close to hitting the market’s five-year norm and nearly matched concurrent supply volumes for the first time since the 1st quarter of 2020. Seattle apartment occupancy climbed to 96.1% in June, notable progress from the recent low of 93.8% logged at the end of 2020. Seattle didn’t see rent cuts get as deep as what was seen in the Bay Area and New York in the COVID-19 era, but this market has also yet to pull itself out of price decline. As of June, effective asking rents were down a modest 0.3% year-over-year. This is the mildest annual decline this market has seen since operators turned to price cuts in July 2020.
Northern New Jersey
Newark absorbed 5,100 units in the 2nd quarter, just missing out on a top 10 national performance. This recent boost pushed annual demand to nearly 9,570 units, the market’s best showing since the 3rd quarter of 2018. Furthermore, demand is back to pacing close to annual apartment supply, which has been at some of the nation’s strongest in the past year. Occupancy has rebounded in recent months, climbing to 96.7% in June, quite an improvement from the low point of 95.8% seen in March 2021. As a result, annual rent growth returned, albeit at mild amounts at 0.5% in the year ending June. Just a few months ago, when Northern New Jersey was at its worst, rents were being cut by 3.3% on an annual basis.
In Boston, apartment demand hit a solid 4,930 units in the April-June time frame, also just missing out on a top 10 national rate. This recent performance made up about half of Boston’s annual absorption of 9,430 units, the market’s strongest annual demand performance in at least a decade. Recent demand pushed occupancy up to 96.4% in June, pacing well ahead of Boston’s five-year average. Boston was another gateway market that saw the return of annual rent growth in June. Prices were up by 1.3% year-over-year after deep cuts were instituted throughout much of 2020.
While the national multifamily industry is emerging from the pandemic in relatively good shape, the apartment industry in the Midwest and Chicagoland is experiencing a more mixed outlook.
Are Chicago and the Midwest contrarian opportunities in the near term? There are silver linings among the clouds, as the states open up and the economy returns back to “normal.” How will the regional apartment industry fare in the coming months and years? Who is actively acquiring and developing in the region, and where are there opportunities to be found?
Come together with fellow multifamily owners, investors, and developers as well as industry experts at the Marcus & Millichap / IPA Multifamily Forum: Chicago & the Midwest. This multi-day conference is held online from November 1 to 3 and in-person in Chicago on November 4.
Chicago does not face the run-up in apartment deliveries that may slow the comebacks in some of the nation’s biggest cities.
While Chicago’s apartment sector has taken a big hit compared many other U.S. markets during the pandemic, the first signals of progress are beginning to appear. Rents jumped 1.4% and occupancy climbed 0.4 points month-over-month in April, the third straight month of improvement for both metrics. With that progress, Chicago is in better shape than other gateway markets like Bay Area, New York, Seattle, and Boston. While the pace of recovery in those markets is hindered by the big volumes of construction underway, Chicago is a different story.
Ongoing apartment construction in Chicago totals some 11,400 market-rate apartments, quite a bit behind the market’s five-year average. While that’s still a substantial volume of future product, it is down notably from recent highs, which is unlike the pattern seen in quite a few other big markets across the country. Ongoing building in Chicago peaked at a little more than 18,000 units in 2017.
Product scheduled to complete in calendar 2021 totals roughly 7,200 units, and another 7,100 units are slated to deliver in calendar 2022.
Chicago’s apartment construction activity has been very urban core-focused during recent years and that pattern is expected to continue. The Loop and the Streeterville-River North area each have some 2,100 to 2,300 apartments under construction.
Demonstrators hold signs during an eviction protest in Foley Square in New York, U.S., on Thursday, Oct. 1, 2020. Bloomberg | Bloomberg | Getty Images
The U.S. is narrowly averting a potential eviction crisis at the start of the new year, as Congress is set to pass a coronavirus relief bill that includes funding for rental assistance and the continuation of the nationwide eviction moratorium.
The bill, which is expected to be voted on Monday, provides $25 billion in emergency rental relief and a one-month extension of the nationwide eviction moratorium, through January 31, 2021.
The provisions are “a start,” Rep. Maxine Waters (D-Calif.) tells CNBC Make It. But more aid and a longer eviction ban are likely needed once President-elect Joe Biden takes office in January, she says, noting that she pushed for the inclusion of $100 billion in rental relief in the HEROES Act, the $3 trillion relief bill passed by the House in May.
“We have to do whatever it takes” to keep people housed, Waters says. Plus, more rental relief also benefits the “mom and pop landlords” who still have to pay their mortgages.
At the beginning of December, around 12.4 million adult renters reported that they are behind on their rent payments, according to the Center on Budget and Policy Priorities (CBPP), highlighting the need for aid. How the rental relief will work
The $25 billion in rental assistance will be funded through the Coronavirus Relief Fund (CRF) and administered by the U.S. Department of the Treasury. Once the funds are dispersed to states, tenants will apply for aid through state or local relief organizations.
How quickly the assistance becomes available will be dependent on where you live, Diane Yentel, president and CEO of the National Low Income Housing Coalition (NLIHC), tells CNBC Make It. Some states, like New York and California, already have established emergency rental assistance programs. Other states, like Alabama and Missouri, will have to set them up, which takes time, she says.
That’s why it will be crucial for Biden to extend the eviction moratorium when he takes office, Yentel says. It will take longer than one month for some states and localities to establish relief programs and get the assistance out to people who need it.
The funds can be used for back rent and overdue utility payments from the start of the pandemic, as well as future bills. At least 90% of the money states and territories receive must be used to provide financial assistance to households.
Renters will be eligible for relief if their household income is below 80% of the area median income (which varies by county and household size), and someone living there: Has qualified for unemployment benefits, has lost part of their income, or has experienced financial hardship because of Covid-19, or can show that they are at risk of losing their home
Landlords and utility companies can be paid directly by state and local governments as long as tenants have signed off on the application. If landlords refuse the aid, renters can apply and receive the funds and then pay their landlords. Households are eligible for 12 months of assistance but may receive up to 15 months if it is “necessary” to keep them in their home.
Renters will also be able to access case management and tenant-landlord mediation services.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
An online real estate database company just released new figures showing that renters’ preferred location is tiling toward the suburbs.
Zillow attributed the new data to the impact of the coronavirus because of the spike in unemployment. Zillow reasoned that renters were hit more severely by the economic effects of the coronavirus than homeowners Instead of shelling out their savings on an apartment, for instance, millions of people who previously rented have chosen to move back in with family.
Joshua Clark, an economist at Zillow, said that while the change may be viewed as a trend of shifting tastes that would be a misleading conclusion. Clark said the trend is due to the economic reality that renters face since the government issued stay-at-home orders and shutdown of many parts of the economy.
Now, real estate investors will have to decide how this recent trend will factor into their investments. To make that decision, investors will have to decide whether this trend will continue past the beginning of the year 2021 when a human vaccine for the coronavirus will likely be publicly available because offices will safely reopen and no longer ask employees to work remotely.
For the analysis, Zillow looked at 34 of the largest U.S. metro areas. In its analysis, Zillow found that rent growth slowed from the months of February to June.
During that period, rent price growth slowed more in urban ZIP codes than in suburbs. And less expensive suburban rentals are now more appealing to price-conscious consumers because they do not need to factor in a premium of commuting to work into their living location as they had to before the coronavirus pandemic.
These changes were able to happen quickly likely due to renters having more flexibility than homeowners. Renters usually have short lease terms and that impacts the fluidity of prices.
Zillow pointed out that the split between urban and suburban rent growth was present in over half of the large U.S. metros studied. It was the largest in Dallas-Fort Worth, Sacramento, San Francisco, and the greater New York metro.
But Clark has warned investors not to jump to a conclusion too quickly based on the indication of the new data.
“It may be tempting to conclude that urban renters who have been cooped up without outdoor space and unable to visit their favorite local bar are ready to commit to suburban life, and that is likely true for many,” Clark said. “But that narrative ignores the job loss that has hit renters, who are disproportionately employed in the industries most affected, and has likely played a bigger role in recent moves.”
Global pandemic, massive unemployment, nationwide social unrest. 2020’s free trial period has expired, and we are stuck with this lemon. How do we make lemonade out of it?
Join the Marcus & Millichap Multifamily Forum: Chicago & the Midwest in a re-imagined, all-digital, online conference format. Spanning ten days from July 21 through July 30, the conference has been organized in brief, easy-to-consume portions to minimize disruption to your work and personal life. Join live to interact directly with speakers through the Q&A feature, or view the recordings on your own time. Either way, don’t miss the group networking discussions that will allow you to connect with your peers directly to forge new connections and reestablish existing relationships.
Reasons to Attend:
Find out what top multifamily owners, managers, developers, and investors are thinking and doing in the Midwest markets
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Downtown Chicago Rents Have Suffered While Suburban Markets Were a Mixed Bag
The Chicago multifamily market has witnessed a tumultuous period over the past three months due to the coronavirus pandemic.
While thousands of Chicago-area residents have been furloughed or laid off as a result of the accompanying economic slowdown, many landlords throughout the region are expecting rent delinquencies to continue over the next few months and remain stuck trying to balance occupancies at the expense of pushing rents.
Rental growth is highly seasonal in Chicago. Rents typically accelerate in the first half of the year and stagnate or fall slightly in the fall and winter months when renters are less likely to be in the market for apartments and the available stock remains lower. Overall, the Chicago market bucked this trend in 2020, with rents in the Chicago metropolitan area falling by 0.8% during the period of May 15 to May 31.
However, in analyzing daily rent changes in multifamily properties from March 15 to May 31, changes in rent varied widely by submarket. For example, some suburban submarkets with tight vacancies and low asking rents actually showed positive rent growth during this time, while other submarkets with a glut of new supply and higher vacancies showed a large decrease in rent growth. Let’s take a closer look at the worst and best-performing submarkets for rental growth during this time period.
Worst Rent Performers:
Elgin-Dundee Submarket: -2.2%
The Elgin-Dundee submarket, with an inventory of 1,016 units and a vacancy rate of 13.8%, was the worst-performing submarket with rent declines at -2.2%. The submarket currently has 300 additional units underway, making up nearly 30% of total current inventory
Downtown Chicago: -2.1%
The largest submarket in Chicagoland with over 40,000 units, Downtown Chicago saw rents decline by -2.1%. Downtown Chicago has the highest asking rents in Chicago at roughly $2,600 per unit, and with vacancy hovering near double digits landlords have little pricing power in the current environment.
Best Rent Performers
Near North Suburban Cook: 7.1%
The Near North Suburban Cook submarket, with a vacancy rate of 7.2%, witnessed the largest positive growth at 7.1%, or an increase of roughly 10 cents per square foot since March 15. This large acceleration in rent growth was driven by a few large value-add rent increases in older Class B and C properties.
South and North Lake County Indiana: 1.9% and 1.7%, respectively
The South Lake County, Indiana, the submarket is one of the few located outside of Illinois that benefits from being part of the greater Chicago area while largely avoiding its numerous fiscal and tax difficulties. With a vacancy rate of 10.1% and no construction underway, the submarket’s small inventory benefits from extremely low asking rents, at $1,200 per unit, compared to neighboring submarkets. That has helped landlords continue to push rents.
Similarly, the northern portion of Lake County, Indiana, largely benefits from its out-of-state location. While asking rents here tend to be higher than its southern counterpart, at roughly $1,600 per unit, it is still discounted when compared to its closest Illinois submarket, Southern Cook County, which commands an additional $300 per unit.
Given the overall slowdown in activity in Chicago, CoStar expects rents to continue to decline throughout the year as demand formation evaporates and thousands remain unemployed.
Some positive signs remain, however, as Chicago begins phase three of its reopening plan on June 3, which will allow for some nonessential retail and restaurants to reopen with heavy restrictions imposed by social-distancing health measures.