9 months ago
9 months ago
In the age when people camp outside for days to get their hands on the latest iPhone, it should come as no surprise that some renters are always willing to pay premiums to live in the newest apartment properties. This is true for both small (5-49 units) and large (50+ units) assets in the U.S. multifamily market.
As apartments properties get older, achievable monthly rent rates tend to decrease. When looking at how rent rates change over time in small vs. large properties, data shows that small assets show lower sensitivity to the age of the asset.
As shown below, average monthly rents in 2014 in newer small apartment buildings (those built between 2010-14) were 20% higher at $1,080 compared to $890 for units constructed in between 1970-79.
Notice that this difference is even greater for large properties, where average rents for buildings brought online during 2010-14 stands at $1,460 — nearly 50% higher than properties built in the seventies. This increase makes sense, considering the majority of large product built in recent development cycles has focused on amenity-rich luxury rentals.
Why are rents in pre-1970 assets higher than 1970-79 properties? Remaining pre-1970 apartment properties are likely well maintained and located in the urban core of major metropolitan areas. Any stock that was not taken care of is likely obsolete by now.
The sensitivity of apartment rents to building age varies not only across property type, but also by unit size. The following chart — which compares how one- and two-bedroom rent rates differ from the average cost of today’s rent in properties built between 1970-79 — illustrates this trend.
It is easy to see the value proposition that small apartment properties offer renters. While one-bedroom apartments in large properties commanded a 60% premium for buildings built between 2010-14, small property average rents were only about 20% higher.
Another interesting trend demonstrated above is that two-bedroom units command a smaller proportional premium in larger assets than small. This is consistent with the market narrative of newly-constructed, amenity-rich large assets being dominated by one-bedroom units.
What does this all mean for the small multifamily investor? Given that rent premiums by age of structure are lower — even across unit size — in small properties, the ability to command higher rents will depend on improving building amenities and unit interiors.
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