How Does Building Age Impact Multifamily Rents?
When it comes to apartments, general wisdom says that the newer the building, the higher the rent. This holds true until you reach the ‘prewar’ vintage, which can approach new inventory rent rates for smaller properties.
Asking Rents and Age of Structure
The vast majority multifamily units delivered this cycle is on the upper end of the quality spectrum. Reis data shows more than one million Class A units delivered between 2009 and 2016 — just 33,400 Class B/C apartments have opened to greet new tenants during the same timeframe. This means lots of apartments with upscale finishes, luxury amenity packages and the higher rents rates.
Yet one interesting finding from recently released Census data shows that certain older structures – especially those representing specific design epochs – command higher rents. Sure, location does play a role, with older properties naturally skewed to more desirable core urban neighborhoods. But let’s dive into the numbers.
As shown above, small properties introduced during the post-crisis period (2009-2015) command the highest monthly asking rents of around $1,000. The slightly lower rents for 2015-built assets likely reflect lease up concessions.
When compared to the newest buildings, asking monthly rents decline consistently with the age of the structure, falling by nearly 17%t for structures built in the 1960s.
Yet this trend reverses for structures built before the 1960s, with asking rents gradually rising, and eventually rivaling market peak rents for units in pre-war buildings.
However, this trend only holds true for small multifamily properties. Asking rents for larger assets show steeper declines with age and only a slight recovery for the oldest structures.
Downward Rent Pressure on Older Inventory
Given the preference for modern apartment features, the addition of newer units is expected to exert downward pressure on rent growth on older existing inventory.
As shown below, the year-over-year (2014-15) rent growth for small building units decreases sharply with the age of the structure, eventually stagnating for buildings from the 1960s.
However, bucking this broader trend yet again, small asset buildings built prior to the 1960s experienced the highest year-over-year change in asking rents, with units in pre-war structures showing the highest rent increases across the board.
For small property owners and investors, a combination of updated unit interiors within older buildings of distinct design and construction styles could prove to be a profitable value-add proposition. However, given varying cultural preferences across US cities, such opportunities would require greater scrutiny. We’ll explore this idea more in our next post.