When it comes to keeping rents affordable for the average American, the solution is simple: increase the supply of housing. Build Baby Build. We are witnessing proof of this in Austin, Texas as we speak. Currently, Austin is experiencing a huge number of newly developed apartment communities coming online, which in turn is putting negative pressure on rents.
It’s not just Class A rents that are softening due to new development. The construction of Class A apartments also affects rental rates in B and C multifamily. Today, multiple markets are experiencing declines in Class C rents, and each of those markets recently added a large number of new Class A apartments to the housing supply.
Learning From Austin Texas
As Austin’s Vacancy Rate increased due to new supply, Asking Rents have dropped sharply
As COVID spurred significant population growth in Austin, the housing market tightened, leading to a rapid rent increase. During 2020 and 2021, Austin's average rent surged from $1,400 to $1,650. In response to this rent increase and population growth, developers embarked on an aggressive building spree. In 2023 alone, over 23,000 housing units were added to the market.
Although Austin’s average rent reached its peak in the summer of 2022, the 2022-era developments continue to reach completion. With new buildings continuing to come online, Austin’s vacancy rate currently exceeds 14%.
While those developers are currently sweating the reduced rents, we can use this moment to witness how effective increased housing supply is in lowering rents. With the substantial increase in supply, the average rent in Austin has experienced a notable decline, dropping from $1,725 in the summer of 2022 to $1,600 today. This is painful for those developers, but a sigh of relief for Austin renters.
Increasing Class A Supply Affects Class C Rents
The markets with the largest decreases in Class C rents also had the most Class A supply added
There's been minimal construction of Class C apartments, yet in the 12 markets shown above, Class C rents are declining. The commonality across these markets is the significant influx of new Class A supply. Multifamily operators will only reduce rent as a last resort, indicating that these Class C buildings must have faced quickly rising vacancies before rent was reduced.
Building Class C apartment buildings would be great, however, it’s just not profitable (without public funding). This is due to the cost of land, labor, and materials. Only Class A projects, with their outsized rents, can justify the cost.
The silver lining is, with each new Class A development, there's a positive ripple effect on B and C properties. Looking at Austin again, the addition of 23,000 Class A units last year created an oversupply in the Class A market, resulting in high vacancies and price reductions. This is the beginning of the chain reaction. As Class A rents decreased, higher-income renters in Class B apartments seized the opportunity to upgrade. Consequently, Class B units experienced increased vacancies, prompting operators to lower rents. These reduced rents in Class B properties attracted higher-income residents from Class C buildings. Ultimately, Class C buildings also had to reduce rents to fill their vacancies. The result is: the Austin market experienced a -9.3% YoY rent decline across Class C apartments.
Final Thoughts
To maintain affordable rents, it comes down to increasing the housing supply. We can’t profitably build B and C properties, but we can encourage and push for as much Class A development as possible. Austin Texas stands out as a prime example, showcasing how a significant increase in housing supply always leads to pressure to lower rents. Don’t listen to the NIMBYs, the more we can build, the better for all.
Market News
NYC Landlords Still Struggle Despite Housing Relief Efforts
If you have been following along you may recall my recent article on rent-controlled buildings in NYC. A new piece by TheRealDeal offers an update on the situation and delves into Albany's recent housing relief measures for owners of rent-stabilized buildings. Despite these efforts, landlords argue that the provisions fall short of addressing the substantial costs of renovating dilapidated apartments. The $15,000 and $30,000 caps on individual apartment improvements are considered inadequate, especially for units needing extensive repairs like lead abatement. Concerns arise over the lack of financing options due to low rental incomes not covering project costs. Moreover, doubts linger on landlords' ability to sustain properties long enough to recoup investments, with some facing potential mortgage defaults. While the relief measures target housing challenges, skepticism remains among landlords about their effectiveness in easing financial burdens.
TheRealDeal. (2024, April 23). "I wouldn’t use it, I would just lock the door”: Landlords pan new rehab law" https://therealdeal.com/new-york/2024/04/23/landlords-say-new-law-no-help-for-vacant-units/?cx_testId=1&cx_testVariant=cx_1&cx_artPos=2#cxrecs_s
Tips & Tricks
Terms:
Class A Apartments: These are luxury properties with high-end finishes, modern amenities, and prime locations. They often target higher-income renters and command the highest rents in the market. Class A apartments may feature amenities like concierge services, fitness centers, swimming pools, and upscale appliances.
Class B Apartments: Class B properties are considered to be of good quality but may lack some of the luxury features found in Class A buildings. They offer functional amenities and are generally well-maintained, appealing to middle-income renters. Class B apartments may have features like on-site laundry facilities, parking, and basic fitness centers.
Class C Apartments: Class C properties are more modest and may show signs of aging or deferred maintenance. They offer fewer amenities and may be located in less desirable neighborhoods. Class C apartments typically target lower-income renters and offer more affordable rents compared to Class A and B properties. These buildings may lack amenities like central air conditioning, dishwashers, or updated interiors.
These classifications can vary slightly depending on location and market conditions, but they serve as a general guideline for understanding the quality and target demographic of different apartment buildings.
Comments