Adobe Stock

Given today’s uncertain economic environment, Class B apartments continue to outperform, according to new data from Cushman & Wakefield’s Q3 2023 Asset Services Update.

As one of the nation’s largest property managers, with more than 178,000 units under management, the company took a deep dive into its portfolio to offer some insights on workforce housing.

Cushman & Wakefield cited several factors that are contributing to the resiliency of Class B units:

  • Renters for the sector tend to be the backbone of the nation’s economy, including teachers and first responders. These jobs tend to be resilient during economic headwinds compared with more cyclical sectors;
  • It’s hard to deliver new housing into the sector, with very little new construction targeted for middle-income renters due to construction costs versus rents. Less than a third of the roughly 1 million units underway will likely serve these renters. Concepts to help incentivize more construction for this product, such as a middle-income tax credit, have been proposed at the federal level but haven’t gained transaction; and
  • Job losses in a recession will likely result in renters seeking to save money. Renters living in Class A apartments could save an average of about $540 per month by moving to a Class B apartment—a 30% savings.

According to Cushman & Wakefield, the broader trend of Class B renters moving out for cost reasons has leveled out over the past few months to 6.5% in September, which is down from more than 8% a year ago. It also noted that there’s been a downward shift in delinquency among Class B renters over the past year.

While demand for apartments has been strong, it’s not limited to new lease-ups. Across its portfolio, Cushman & Wakefield noted that it is seeing applications for Class B rentals picking up, with August and September being the two highest months for Class B applications in the past year.

“While higher rates have had a significant impact on commercial real estate, the broader economy continues to show strong GDP and job growth, both of which tend to correlate well to apartment demand,” explained the update.

Across Cushman & Wakefield’s multifamily portfolio, Class B also continues to post strong occupancy numbers—about 65 basis points higher than the broader portfolio’s stabilized occupancy, with an increase of about 130 basis points over the past year.

“There is no guarantee that Class B product will continue its run of strong performance, especially with the supply-side pressure the market hasn’t experienced since the 1970s,” noted Cushman & Wakefield. “But with rents that are more affordable to the average renter, there is a case to be made for continued optimism.”