Low-Rise Apartments Outperform Amid COVID-19 Uncertainty

Throughout the unexpected shifts in apartment performance in 2020, the comparative affordability and predictable demand found in low-rise properties has made that asset class a top performer of late.

Across the nation, low-rise properties with three or fewer stories are outperforming mid- and high-rise apartments for both rent growth and occupancy. Even more impressively, that trend carries through each of the nation’s large markets, as rent growth and occupancy in garden apartments run at or above the market average in all the 50 largest apartment markets in the U.S.

Mid-rise properties are those with four to six stories, while high-rises are seven or more stories.

Effective asking rents in the U.S. were cut by 1.5% year-over-year as of September. Price declines were steepest in high-rise apartments, with cuts of 8.1%, while mid-rise properties saw rents fall by 4.4%. On the other hand, low-rise apartments were still seeing rent growth, at 0.8% annually.

Similarly, low-rise apartments are still logging rent growth in about half of the largest apartment markets. In fact, in Phoenix, Atlanta, Baltimore, Indianapolis, Tampa, Philadelphia and many others, low-rise rent growth is the only thing keeping the market’s rent change in the black. Even in places where low-rise rent change is seeing the steepest cuts – namely the Bay Area, Austin and Los Angeles – that performance is still much better than the much deeper rent cuts in mid- and high-rise product.

Occupancy across the different building heights shows similar trends. In the 50 largest apartment markets in the U.S., low-rise occupancy runs at or higher than the market’s total average occupancy rate. In other words, low-rise performance is certainly not bringing down the market average anywhere. And in many markets, low-rise occupancy is picking up the slack seen in mid- and high-rise performance.

In September, average occupancy in the U.S. dipped to a still respectable 95.8%. Though, a reading of 92.9% in the nation’s high-rise stock and 94.6% in mid-rise properties hampered total performance. Meanwhile, average low-rise occupancy of 96.3% boosted the national norm.

Markets where low-rise occupancy outperforms the market average by more than 100 basis points (bps) are San Francisco, Chicago, Miami, Boston, Seattle, Los Angeles, Washington, DC and Minneapolis. It’s no surprise that these markets (except for Minneapolis) tend to be the pricy, gateway locations. In these markets, underperforming high-rise occupancy is bringing down the market average while stable low-rise occupancy performance is boosting it.

What is it about building height that results in such varied performances recently? Intrinsically, nothing. But buildings of different heights are found in different places geographically, and low-rises are heavily concentrated in America’s suburbs – particularly in the Sun Belt, which has proven much more resilient to the economic effects of COVID-19 than gateway markets. The pricier downtown areas across the country – and especially in the ultra-expensive gateway markets – have struggled through the pandemic and resulting economic recession, causing high- and mid-rise performance to suffer. The more affordable suburbs, however, have better withstood those effects, as renters are better able to cover the lower rents in the event of job loss.

Steady low-rise performance isn’t a new trend. But considering the uncertainty brought by the COVID-19 pandemic, this building class is primed to stay strong in the near-term.