Class-B Trends & Forecasts

Demand

  • The long-term demand for apartments is solidified by the 70 million strong “Gen-Y” demographic that will dominate the apartment market, with 72% forecasted to rent as a lifestyle choice
  • Near term demand driven by the Echo Boomer and immigrant household formations with high propensity to rent
  • Stricter lending standards thwarting some would-be homebuyers
  • U.S. homeownership is at it’s lowest level in over a decade. Each 100 basis point drop in homeownership rates creates 1 million new rental households
  • U.S. Census Bureau forecasts 15 million new household formations in the next decade
  • Apartment occupancies nationwide are at a record high 95.8% in 2014

Supply

  • All new construction is Class A product which must rent out for much higher rates than Class B because of high land and construction costs. Class B is more affordable to a wider pool of renters
  • Some Class B and C inventory is being demolished for new Class A apartments further constraining Class B supply
  • New supply is more difficult and expensive to deliver
  • Older Class B assets can be rehabilitated
    and repositioned

Forecast

  • High levels of current and future demand, coupled with limited supply, creates an environment for there to be significant upward pressure on Class B rents. This scenario is further supported by the large gap between current Class B rents and much higher new Class A rents
  • Apartment leases reset every 6 to 12 months, so rental rates can increase with market demand. Rising rents, coupled with low fixed rate financing, mean increased NOI year
    over year