When it comes to apartment demand, it’s generally understood that class “A” units are at the top of everyone’s list. They’re the most recently constructed, have the highest quality amenities (like high-speed WiFi, gym facilities, and in-unit washer dryer hookups), are in good repair, and generally are the most attractive to prospective tenants. Why, then, are recent reports showing that class “B” and “C” apartments are actually pulling in more revenue than their class “A” counterparts? Let’s take a look at some possible reasons why below.
The Rent is Too High
The old saying about getting what you pay for holds true in real estate. Class “A” apartments may have the best of everything, but all that stuff doesn’t come cheap. With Southern California already in an intractable housing crisis, it’s likely that the price of renting a class “A” unit is simply too high for most people to afford.
Sure, people need housing, but no one is going to try renting an apartment when they can’t actually pay the rent. Even if they did, they wouldn’t be able to provide all that much revenue before being forced to move out. This also explains why lower classifications of apartments are generating more revenue. Any living space that’s even the least bit affordable to a wide swath of the population is likely to be snapped up after less than a week on the market, while more expensive apartments might sit empty due to a lack of financially stable renters.
The Renting Population is Younger
When it comes to real estate, millennials are living up to their reputation of disrupting the status quo. More millennials are living at home for longer, in order to avoid paying exorbitant rent that they can’t afford. Those that are living in their own apartments are doing things quite a bit differently from previous generations. As this report from the National Apartment Association states:
“Cohabitation is rapidly increasing, and the impact of fewer jobs, lower wages, student-debt obligations, credit card and other monthly debt payment requirements means more, not fewer, current and potential renters.”
For many younger renters just getting into the market, it’s just not financially feasible to go for class “A” properties. Most millennials are likely to live with a number of roommates in class “B” and “C” properties, in order to keep their rent as low as possible. This is especially true in areas with very high property prices, like California. Remember that many millennials have tens of thousands of dollars in student debt to pay off. If forgoing the newest, fanciest apartment features will help them get out of debt faster, most of them are willing to make the sacrifice.
The market for apartments has never remained stable for long, and these trends may well reverse if and when the economy starts to improve for middle class workers. For the foreseeable future, however, it’s a pretty safe bet that more affordable properties will continue to attract more tenants, and thus provide more revenue, than those with the best amenities. We should expect this trend to continue as long as both new housing construction, and job growth, continue to be sluggish.