Class C Apartments Showing Cracks

Class C apartments are beginning to soften as renewals and rent collections lag. 

In a new analysis, RealPage’s Jay Parsons notes that retention rates for Class C apartments “dropped more than expected” last month to end two percentage points down year-over-year to 58.1%. And while “that’s still well above Class A and B (as Class C renters tend to be stickiest with fewest available alternatives)…it’s also a five-year low,” Parsons writes.  Conversely, retention in Class A and Class B ticked down slightly and are above pre-pandemic levels.

Collections for Class C units also fell 0.2 points year-over-year and 0.5 points month-over-month to 93.7%, and the gap between Class C and Class A or B rents have widened. Class C rent payments tend to be lower than Class A or B, even pre-COVID. Class A collections hit 97% in July and 96% among Class B units.

What’s more, rents have grown more slowly for Class C properties, according to Parsons’ analysis. Rents for those renewing a lease in July in a Class C property ticked up 7.8% above the prior lease – “below headline inflation of 8.5%, meaning that housing costs increased at a slower rate than other expenses,” Parsons says. “By comparison, renewal rents increased nearly 12% in both Class A and Class B. Additionally, among new lease signers, Class C renter incomes have nearly kept up with asking rents – with incomes up 16.3% and rents up 17.6% since March 2020.”

Income levels for renters who live in Class C housing also were more impacted by the pandemic, according to Parsons, as the units serve a higher share of renters working hourly paid jobs in sectors like hospitality that were particularly hard-hit hard by the pandemic.  While those incomes have surged as of late, Class C renters are “still playing catch-up” with Class A and B. 

Class C new lease rents averaged $1,348 nationally in July, 23% below than Class B and 40% below Class A.

“To be clear, overall Class C fundamentals remain very healthy. Occupancy remains very elevated at 96.8%. Incomes among new lease signers continue to grow briskly, and vacant units are getting leased quickly as ever,” Parsons says. “But several key indicators weakened among Class C apartments in July.”

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