Record Apartment Supply Compresses Pricing Across Asset Classes

Unprecedented levels of apartment supply completing in the last two years has softened occupancy and increased vacancy nationwide. As such, rent performance has all but stalled across the nation in market-rate, multifamily assets. But it’s not just the most high-end, Class A units – which have historically been the most sensitive to new supply – feeling downward pressure from the more than 557,000 units that have delivered across the country in the last 12 months. 

Instead, the record number of units in lease up has impacted all three product segments, resulting in a reduced pricing premium between asset classes. This is seen not only in Class A and Class B product, but also between Class B and the more affordable Class C segment.

Between 2010 and 2019, the delta in effective asking rents among product classes fluctuated very little. Luxury Class A rents averaged 32.2% higher than Class B units during that time, according to data from RealPage Market Analytics. Class A renters, in other words, paid one-third more rent than Class B renters, on average. Rents in the more affordable Class C units, meanwhile, averaged 21.3% less than Class B counterparts. 

Over the past few years, those deltas have compressed. As of 3rd quarter 2024, Class A effective asking rents ($2,316) averaged just 24.8% above that of a Class B unit – a significant compression from the over 32% delta seen previously.

Meanwhile, Class C effective asking rents ($1,485) now run just 19.5% below that of Class B rents ($1,805) as of 3rd quarter.

The reduced rent premium has largely been driven by a record number of new apartment units delivering to the market. With so many more options for potential renters to choose from, new units in lease up have had to get more competitive with their pricing, attracting new tenants through more substantial concessions. As a result, pricing in lease up units has fallen significantly below Class A units, standing closer to today’s Class B rents. 

The monthly rent of a new multifamily unit in lease up averaged $2,039 as of 3rd quarter 2024. That was roughly 13% below the average stabilized Class A rent ($2,316). However, the rent premium for a Class B unit ($1,805) to a new lease up unit was only $234, or 12%.

In total, 94 of the nation’s 150 largest metros registered a rent premium for Class A units below the national average in 3rd quarter 2024. Among top 50 markets, the smallest Class A premiums were found in Portland (9.1%), Richmond (13%) and Las Vegas (14%). When comparing Class B to Class C, Austin (9.8%), Raleigh/Durham (11.9%) and Charlotte (12%) had the smallest pricing deltas among major markets.

The reduced premium between product classes, continuing today as a result of record supply, supports an economist theory called filtering. In high-supply markets where rents on new leases are being cut or offered with deep concessions, would-be Class B renters can now afford a Class A unit with relatively little strain to their budgets. That creates availability in more affordable Class B units, which may then be snapped up by would-be Class C renters who, again, have seen rents compress. All this creates more vacancy at the bottom of the price spectrum, increasing availability of affordable units in a given market.