As the entire apartment market continued to tighten in the third quarter, rental data said one group of apartments is coming on strong. And it wasn’t necessarily the Class A sector that one would expect. “The hot segment of the market is that middle market,” says Greg Willett, who heads the research and analysis team at Carrollton, Texas–based MPF Research. “There’s some progress, particularly in the middle market."
Jay Denton, vice president of research at Dallas-based Axiometrics, says B’s rental growth has shadowed that in the A level for a while. “From the time the market started to recover, they’ve grown at a very equal pace in terms of effective rent growth and occupancy growth,” he says.
But overall, Willett sees middle, with middle-market and bottom-tier properties beginning to close the gap on the premium that had registered earlier in the top tier. “The interesting thing is how uniform this rent growth has been,” Willett says.
All three classes are above 90 percent occupancy nationally, with Class C properties at 91.2 percent, Class Bs at 94.8 percent, and Class As at 95.8 percent, according to Axiometrics. Class As have also outpaced other groups in effective rents, with growth of 11.54 percent over the past 20 months. Class Bs grew at 10.44 percent, while Class C properties grew at 6.74 percent.
“Cs have had it OK,” Denton says. “The As and Bs, depending on the market, have had extraordinary growth.”
MPF Research breaks apartments into category by age. Those properties built after 2000 are 94.8 percent occupied and have seen an occupancy improvement of 1.5 percent and annual rent growth of 4.5 percent. Older properties have kept pace, though. Properties built in the '90s, which are 95.5 percent occupied, have seen 0.5 percent occupancy gains and 4.3 percent annual rent growth. Properties built in the '80s are 94.3 percent occupied and have seen 1 percent improvement in occupancy and 3.7 percent improvement in rent growth.
But the older properties, normally considered Cs, aren’t doing poorly. Properties built in the 1970s are 93.5 percent occupied and have seen 0.9 percent occupancy improvement and 3.6 percent rent growth over the past year. Those built before 1970 are 94.3 percent occupied and have seen 0.7 percent occupancy growth and 4.3 percent rent growth over the past 12 months.
But Willett admits that the economic unease is felt in the lower-level properties. “When you’re getting to C product, it comes down to getting jobs created,” he says.
Not every market sees the same growth levels. Atlanta, Dallas, Houston, Miami, and Oakland, Calif., have shown the greatest discrepancy in rent growth between Class A and Class C properties since December 2009, according to Axiometrics. In Houston, for instance, the As are almost 96 percent occupied and the Cs are 83 percent occupied. There’s almost a 13 percent gap in levels of occupancy.
“In some markets, like Atlanta and Houston, Cs struggle [with occupancy],” Denton says. “In other markets, like San Francisco and Oakland, Bs are occupied but can’t push rents because the elasticity and income growth in that group isn’t as strong.”
On the flip side, Class A properties have underperformed Class B and C properties in Bethesda, Md.; Durham, N.C.; Minneapolis; San Diego; and Santa Ana, Calif. For instance, in Minneapolis, rents of C apartments have grown 15 percent since December 2009. But usually C is confined to places like college towns, where they represent affordable rentals for students. “In college towns, it seems like Cs do OK,” Denton says.