New from MPF Research: Rent Stratification

rent stratification

 

MPF Research released some fascinating data recently on rent stratification (price differences based on property class) in markets across America. It turns out that in one city a Class A apartment might cost you only 30% more than a Class C, and in another, nearly three times as much!

Foremost among factors driving larger differentials has been the nature of new properties coming online over recent years. They’ve tended to be in urban core centers – more expensive than other types of properties, and demanding a more affluent renter base. Even in the suburbs, developers have favored mid-rise communities with garage parking over low-rise projects with surface parking – again, more expensive and necessitating higher-end renters.

Differences in Class A and Class C Rents

Across the country’s 100 largest metros, the highest-tier Class A apartment on average rents for $1,663, right around twice the $850 cost of a Class C apartment. But drill down to view individual markets and you find some in which the “haves” pay even bigger premiums over the “have nots.”

The largest variances tend to be in big coastal cities and their outskirts (with Chicago thrown in as well). Only these areas can support the kind of salaries necessary to soak up Class A apartments that can cost – in the case of New York, for example – over $4,500 per month to rent. Class A rent is significantly cheaper but still quite high in Boston ($3,148), Southwest Connecticut ($3,598) and Northern New Jersey ($2,955).

What’s surprising about these markets is not the high rents; we all know about those. It’s the dramatic drop from Class A to Class C. In Boston, Southwest Connecticut and New York, for example, you’ll pay around 2 ½ times as much for a Class A apartment than you will for a Class C. The lifestyle difference between those on the sunny side of the street and the others struggling along with the rest of middle America is most striking in these areas.

Accordingly, the rent differential diminishes in the less populous, slow-growth areas, where you’ve got a much smaller pool of affluent renters in big-money jobs living high above those at the bottom. Areas with relatively modest rent differences include Harrisburg, El Paso, Tucson, Albuquerque, Omaha and Providence. In these communities, Class A apartments get a premium of less than 50% over Class C.

Outliers in Rent Stratification

In some markets, the rent differential seems a bit mysterious until you begin to dig deeper for reasons, as MPF Research did.

For example, you might expect Washington, D.C. to show a high variance between Class A and Class C rents. It’s a big coastal city, after all. Then you remember the feverish pace at which new communities have been coming online in popular areas of the capital, making available a plentiful supply of new Class A inventory that has put a ceiling on top-end pricing, at least for now. In Washington, the average Class A apartment will cost you around 88% more than a Class C – about half the percent premium you’d pay in the Big Apple or Boston. Charlotte, Houston, Denver and Raleigh are other markets showing modest rent variances.

And there’s another dynamic that can reduce the rent variance in areas where you might expect it to be larger. Orange County provides a good example of this, with Class A rents only 53.9% higher than Class C. The reason? It’s not that Class A is a bargain. It’s that there’s just not enough Class C around, causing the rent to creep up towards the levels of more luxurious properties. These are areas where it’s tough to live if you have a lower-paying job.

MPF’s research and explanations demonstrate that while rent stratification can seem almost random from one city to the next, it never really is. The old dynamics of supply and demand, together with property location, age and amenities, are precisely correlated to the spread between Class A and Class C rent pricing.

 

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Author and Contributor

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Based in New Orleans, Guy Lyman is a professional writer with over 25 years’ experience writing about multifamily and commercial real estate. Lyman is a frequent contributor and writer for the Property Management Insider blog.

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