How Do Rents Compare by Unit Mix in New and Old Buildings?
Small apartment properties present strong value at both ends of the property age spectrum, with the most recent and prewar properties outperforming market averages across unit size.
A Prewar One-Bedroom Unit Packs a Punch
In our two recent blogs, we explained why prewar small multifamily buildings are surprisingly resilient and competitive with respect to average rents, and that these buildings included a higher share of one-bedroom units.
Bringing these themes together, we further drill down on the value proposition in older buildings by looking at rent spreads across dimensions of unit mix and date of construction.
As shown below, by the end of 2016, average gross rents for one-bedroom units in buildings constructed prior to 1950 stood at $1,060. This was identical to the price commanded by the most recent construction, and represented a premium of 13% over the market average1.
Two-bedroom rents in recently constructed buildings (2010-16) averaged $1,230 per unit — a premium of 11% compared to the market average ($1,106). Prewar buildings again demonstrated strong performance in this unit size, with rents around $1,190.
Newly constructed units with three or more bedrooms commanded the highest overall rents in this asset class at $1,340 average per unit. At the other end of the size spectrum, newly constructed studios commanded the widest premium spread, at 18% over the market average for these units.
Two-Bedrooms in Newly Built, Large Assets Lead the Sector
In comparison, large prewar apartment buildings perform below-market average across all unit sizes in this asset class. This contrasts with the higher comparative value assigned to small prewar buildings, often found in historical downtowns with a distinct cultural milieu.
As shown below, recently constructed large assets had the most value, largely due to their offerings like updated amenities and a downtown location. Average rents stood at $1,500 for studios (a 35% premium over market average) and reaching $1,800 for two-bedroom units (23% premium).
The preceding discussion highlights that in addition to valuing highly amenitized new construction that is typically associated with large properties in the urban core, the wider rental market also favors cultural assets, as represented by smaller, older buildings. This calls for a slightly refined value play for investors, involving historic preservation and remodeled interiors.
1All data is sourced from the American Community Survey (ACS), unless otherwise stated. ACS statistics are sample-based estimates of the compositional profile of the total population in the given year of data collection, and include a margin of error.