Demand for luxury apartments has proven resilient so far this year, according to the midyear Class A Multifamily Outlook report from Institutional Property Advisors (IPA), a division of Marcus & Millichap.
Through the middle of 2023, Class A vacancy increased by 30 basis points (bps), compared with 40- and 80-bp increases for Class B and Class C, respectively. This is despite strong supply-side competition facing luxury units during record construction levels.
Nearly 200,000 new units were delivered during the first half of the year, which surpasses the prior record for the same period by almost 25,000 rentals. IPA anticipates about 400,000 units to open this year, with 2024 slated to be even more active.
Out of the more than 1 million rentals underway, over 60% have preliminary completion dates slated for next year. However, labor challenges, approval delays, insurance adjustments, and softer conditions are expected to push some of the deliveries to later years, tempering 2024’s volume.
Kicking off the third quarter, the average effective Class A rent was up 4.5% year over year, aligning with more typical numbers in the decade prior to the pandemic. The pace is expected to soften in the second half of the year as vacancies rise; however, the report noted that progress will stay positive on an annual basis as the opening of high-quality units will help offset some flat renewals and discounted rates.
According to IPA, concessions haven’t risen dramatically, with approximately 9% of Class A units offering them in June compared with 7% during the same month last year.
With rent growth cooling as well as home prices and interest rates rising, renters are finding some high-end apartments to be more affordable relative to homeownership. IPA notes that the difference between renting a Class A apartment and a typical monthly mortgage payment on a median-priced home increased to about $660 a month in the second quarter.
“Today’s high barriers to homeownership are helping support demand for high-end apartments, particularly among the millennial demographic,” said John Sebree, senior vice president and national director of IPA’s multi-housing division.
Metros with large populations of young adults or extreme homeownership barriers are positioned for robust Class A apartment demand tailwinds. Austin, Texas; Denver; New York City; Salt Lake City; San Francisco; San Jose, California; and Seattle-Tacoma top the list for markets where over 30% of the total population is comprised of 25- to 44-year-olds. Metros with Class A affordability gaps exceeding $2,000 per month as of the second quarter include Boston; Denver; New York City; Oakland, California; Orange County, California; Portland, Oregon; San Diego; San Francisco; San Jose; and Seattle-Tacoma.
“These factors are supporting Class A apartment performance even amid a sizable construction pipeline,” added Sebree.