What It Means When Apartment Demand Plunges In The Urban Core

Across the country, people have found a way, sometimes with the help of federal stimulus, savings or installment plans, to make their rent payment. In instances where the rent burden is too great, people have moved back in with family, added roommates or relocated to a lower-cost community. As the National Multifamily Housing Council (NMHC) has shown through its monthly rent payment tracker, as of the end of October 2020, 94.6% of renters have made a payment toward their rent obligation compared to 95.9% last year. This is a sign of the resiliency that draws investors toward apartments. However, rent collections don’t tell the full story.

Downtown cores, job centers and high-cost locations have all seen a precipitous drop in apartment demand that hasn’t fully worked its way into the research data. However, my analysis of research from Apartment List (downloads required) for the year ending September 2020 shows that asking rents in the California cities of San Francisco, San Jose and Oakland declined by a rate of 20.4%, 9.8% and 9.3%, respectively. This is compared to a nationwide drop in asking rents of 1.4%. With major employers like Google telling their employees to work from home until July 2021 and Twitter saying anyone who wants to work from home can indefinitely, there has been an exodus — potentially a temporary one — of Bay Area residents to lower-cost locations. This has created reduced apartment demand and a corresponding decline in rents.

Plummeting rents aren’t only being witnessed in expensive locales like San Francisco, but also in many downtowns across the country — high-cost or not. According to data from CoStar that we analyzed, in Downtown Minneapolis, where the average monthly rent for a one-bedroom apartment was $1,426 in the third quarter of 2020 compared to $2,515 in San Francisco, apartment properties have resorted to offering one to three months of free rent to entice new residents. The amenities of living in a vibrant downtown — restaurants, theaters, nightlife — are all put on hold. In addition, office building managers here in Downtown Minneapolis estimate that only 10%-15% of downtown workers are back in the office. The argument for paying a premium to live downtown where the primary amenity — its vibrancy — is gone.

Instead of a race to the bottom in rents to attract people, there is simply a lack of demand that can’t easily be increased, even by drastic changes in price. Three months free on a 15-month lease is a 20% discount. Two months free on a 12-month lease is a 17% discount. These discounts should create enthusiasm and interest for a renter. For an owner, these steep price drops should quell any concern over rising vacancy. However, they’re not having the intended effect.

Discounts alone can’t force people to move back into buildings with elevators, enclosed spaces and amenities they cannot use. All owners are fighting over a smaller pool of people willing to repopulate the urban areas and those tenants have myriad options now. According to our look at CoStar data, the vacancy rate in Downtown Minneapolis is now 13.4% (compared to 6.1% across the Twin Cities) and even 10.3% in San Francisco (up from 5.6% last year). These pandemic-created setbacks will take time for communities like these to heal from.

If renters aren’t taking advantage of basement-bargain pricing in downtowns, where are they going? They’re fleeing to garden-style properties in the suburbs, moving back in with family or finally making that single-family home purchase. These are generally lower-cost options or provide someone with more space and separation from their neighbor. A backyard of any size and patio is of higher value today than the designer lobby and professional gym found in luxury apartments. Additionally, the smaller unit size found in many urban new construction properties may increase the claustrophobia from working at home indefinitely.

At the same time, the calls for permanent declines in dense urban areas and primary cities (New York, Boston, San Francisco, Los Angeles, Chicago) are premature. These cities will open back up and the reason people fell in love with them the first time will rise to the surface once again. As owners struggle with operating in those markets today, a unique opportunity will be presented to take advantage of pricing dislocations. Operating statements will likely be depressed over the next 12 months and property sales will be at values below pre-pandemic levels. However, the ultra-low interest rate environment we’re in should serve to lessen the blow to values as lower yields are made more palatable.

Our major cities have been counted out in the past, and they’re still not going anywhere. Though technology has made working from home (wherever that might be) easier, and has potentially sped up the growth even more of secondary cities like Nashville and Austin, there will always be demand for apartments in traditional urban centers.

Source: https://www.forbes.com/sites/forbesrealestatecouncil/2020/11/13/what-it-means-when-apartment-demand-plunges-in-the-urban-core/?sh=31763a62325c