Small Apartment Buildings Show Tighter Rent Spread by Property Age
Compared to other rental properties, average rents in small asset multifamily vary less by property age, while rents for prewar buildings are going toe-to-toe with newer construction.
What is the Age Profile of the Renter Base?
After experiencing record levels of activity in 2017, multifamily construction is cooling-off in response to softening rental demand. Many large projects conceived during the boom years are still being completed, setting the market off in a price correction mode across new and old properties alike, as the supply glut reaches resolution.
In this update, we provide context to these dynamics by examining the age profile of rental inventory and the relationship between property age and unit rents across property types.
As shown below, by year-end 2016, 26% of all large asset multifamily units were constructed after the year 2000, with 11% coming online after 20101.
In contrast, only 5% of all small asset properties were constructed after 2010, with the total since 2000 accounting for 16% of inventory. These trends were similar for single-family rental units, which added a share of only 3% since 2010.
At the other end of the spectrum, the share of prewar buildings (built before 1950) stood at around 14% across both small and large apartment buildings.
Unit Rent Spread by Building Age
As depicted below, across all asset types there exists a clear relationship between average unit rent levels and building age, with the newer units commanding higher rents.
However, the oldest small asset units (built before 1950) were extremely competitive against more recent construction, indicative of consolidation and retention of higher-quality assets with prewar character, typically found in older downtowns.
As shown below, the rent premium for recent construction (built 2010-16) is narrowest for small asset multifamily. For example, the premium over prewar buildings in the small asset class is less than one-fourth of that observed for large properties of similar vintage.
The above indicates that price pressures act differently across asset classes with regards to property age, where investors could find value on a case-by-case basis even for older inventory.
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.