On Second Thought: Renters Make Sharp Reversal on Apartment Preferences

Apartment renters’ preferences for the types of units and amenities they look for have shifted quickly since the onset of the pandemic. Larger units are now more preferred, while high-rise living is losing popularity fast. Most shared amenities are now unloved, though some with an outdoor aspect still have appeal.

However, just as quickly as renters altered their preferences, we expect many of these changes are poised to come back into favor once the national health crisis subsides, while some may persist.

In order to better understand how apartment tenant preferences are changing, we analyzed the impact of unit sizes, apartment type and amenities on rent levels. While this analysis does not account for every possible variable affecting rent differences between buildings, the data does suggest meaningful differences in tenant preferences now compared to the start of the pandemic.

Pandemic’s Impact on Preferred Unit Size

We have previously written on renters’ newfound desirability for suburban living, which includes a new preference for larger units, but our data suggests that the preference runs deeper than just a suburban shift and also runs counter to previous trends.

One possible explanation is that prior to the pandemic, smaller units weren’t necessarily appealing but renters were willing to give up some space in exchange for lower rent, and developers were happy to indulge that trend to achieve higher rents per square foot. Our analysis of daily apartment rents suggest that smaller units still achieve higher rents per square foot, but the per square foot premium for smaller units has marginally shrunk.

As has been true for many years, each square foot added in apartment size actually contributes a negative factor to rent per square foot. A studio tends to achieve higher rents per square foot than a two-bedroom unit, but the spread between the rent per square foot has weakened lately. All things being equal, an addition of 200 square feet would have created a theoretical rent decrease of 21.8 cents per square foot at the beginning of the year. Today that would be 20.6 cents.

Put another way, prior to the pandemic an apartment building with an 800-square-foot unit renting for $1,600, or $2.00 per square foot, would rent a similar 1,000-square-foot unit for $1.782 per square foot, or $1,782.

The change is not enormously different; if the rent on the 800-square-foot unit were still $1,600 today, that 1,000-square-foot unit would go for $1,794. But that marginal move erased the rent gains that smaller units made since January 2018 and, more important, shows no signs of slowing.

This trend to prefer larger units could relate to one of two factors. First, work-from-home probably made renters desire more space to accommodate new home offices. Second, in economic downturns, demographics generally tend toward a higher number of people per household as employment prospects dim and more tenants seek roommate situations.

The second factor should abate over time as the economic situation improves. While work-from-home will likely stick around at a much higher rate from the pre-pandemic era, it is worth noting that the estimate of rent-effect still indicates that larger units garner a lower rent per square foot. Smaller units would still create more value per square foot for developers, but perhaps a little less so.

High-Rise Properties Losing Rent Premium

One key finding from this analysis is how quickly high-rise living lost its popularity. There has been a notable decline over the past six months in the rent-per-square-foot estimate gained in a high-rise apartment building, regardless of where it is located.

However, while the preference for larger unit sizes seems likely to be a longer-term effect as a result of the pandemic, the impact on high-rise apartments could be shorter lived. Also, it’s important not to conflate high-rise in this sense with downtowns, which is why we controlled for geographies in our analysis.

Fear seems a likely explanation for the decline in rent estimates for high-rise buildings. There’s been much discussion of elevators as it pertains to getting workers back to the office, and how to efficiently use them without packing workers into tight quarters during a time when any of them might be carrying a highly communicable disease. Those fears persist for residential buildings as well.

What’s more, even if a building does have social distancing rules that they strictly enforce to keep tenants safe, it likely comes at the cost of convenience. For a tenant who feels that they have little or nothing to fear, the lengthened wait to use the elevator likely explains part of this. Furthermore, quite a lot of new apartment buildings currently in lease-up phase are high-rise, boosting supply and putting pressure on prices to be competitive, which undoubtedly plays a role as well.

Once the impact from the pandemic and elevated supply wave pass, high-rise buildings should regain much of the rent premium that they have lost. For now though, we warn that the downward slide here shows few signs of abating.

Amenities Providing Less Rent Boost

Size of units and the number of floors alone don’t define an apartment building’s rent potential. Over the past 10 years, high-quality buildings have become more and more amenitized. In many cases, this analysis revealed a rent premium for certain amenities has continued, but for most, that bonus is shrinking as the pandemic continues.

While CoStar tracks about 170 amenities for apartment buildings, many were found not to be statistically significant. This analysis focused on a shortened list of more interesting and relevant features.

Since March 15, the appeal of most public amenities has waned significantly. Fitness centers and grills, both of which typically provide a cyclical boost to asking rent levels in prime leasing months, have lower contributions to rent estimates since the virus hit. This makes sense, as many of those fitness centers are probably closed or unused by nervous tenants, and grills are likely less used when large gatherings are prohibited.

Pet washing areas are similarly communal, and though they didn’t have the same cyclical aspects, they have also lost a lot of ground in terms of their rent-boosting potential, presumably because people avoiding those public amenities no longer feel the need to pay more for them.

On the flip side, a couple of amenities have increased in value since the pandemic began. Fireplaces are an apartment luxury that experienced a continued boost to rents, while playgrounds also seem to have become more popular. Presumably this is because children who are home from school need more tending to, and having access to outdoor places where they can exercise becomes more valuable.

Looking to those tested amenities that created the most value, renters seemed willing to pay more for roof terraces and various other pet amenities. Both of those have declined in the recession, but presumably post-pandemic many of those premiums will recover. Certainly, pet amenities are poised for a recovery, given reported jumps in pet adoptions during the pandemic. The current weakness in terms of rent contribution again likely stems from an inability or unwillingness by renters to actually use the amenity.

Onsite business centers are an amenity that has consistently had a weak impact on apartment rent, and continued weakness since the pandemic makes sense given the public nature of these spaces. But it is possible renters did not terribly value business centers prior to work-from-home becoming the pandemic norm. There is a distinct possibility that this particular amenity makes a comeback as a vaccine becomes available and work-from-home policies stay in place to some degree.

It may be that home-based workers prefer to stay in their pajamas, but still want access to things they need but not always have in their units, such as printers. In this scenario, business-oriented amenities could gain in value.

Picking the right amenity mix for the area and target audience is important, but it is also a bit tricky. Virtually none of the amenities examined in this analysis have a strong correlation with each other. Fitness centers and business centers tend to match up well, and grills and picnic areas also have a weak positive correlation, while playgrounds and roof terraces have a weak negative correlation. For the most part, there’s not a lot of strong relationships between these amenities.

The pandemic upended a lot of what renters were looking for six months ago. Building styles, unit types, locations and amenities have all proven vulnerable to the changing wants and needs of apartment renters in the time of coronavirus. Many of these changes likely will revert back to some degree upon the availability of an effective treatment or prevention of the disease.

The two changes that have the most staying power are the increase in desired unit size and a preference to be in the suburbs, both a result of the tremendous and sudden increase in work-from-home rates. Until such time as treatment arrives, the trends affecting apartment rents identified here are likely to continue, even as we monitor them for signs of reversal and recovery.