Some Apartment Markets Draw Eye-Popping Rent Growth in Pandemic

Demand for apartments in more affordable Sun Belt cities is rising while asking rents in pricey coastal cities are falling as the pandemic roils the country’s apartment markets.

To get a better sense of what’s driving both the best and worst metropolitan areas for rent growth, CoStar Analytics analyzed the top 20 and bottom 20 multifamily areas nationwide.

For this analysis, only submarkets with more than 5,000 units were examined. This allows for a large enough sample of rent observations from Apartments.com and CoStar’s other listing websites, as well as CoStar’s multifamily research team.

Many of the areas of the country with the highest rent growth are in fast-growing Sun Belt cities such as Atlanta, Phoenix and the Inland Empire in California. Those locales benefit from net migration from more expensive coastal markets, boosting demand for housing.

Digging deeper, another common thread is a lack of supply. The top 20 rent growth submarkets collectively completed 1.2% of total inventory over the past 12 months and have 1.9% of inventory currently under construction. For comparison, the national average is roughly 2.5% for trailing 12-month deliveries and 3.4% for inventory under construction.

And speaking of supply, the existing apartments in these areas is heavily tilted toward mid-quality, three-star housing stock, which is outperforming the national average. Of the top 20 rent growth nodes, 50% of inventory is three-star, or Class B, properties.

The booming industrial market has also benefited many of the submarkets on the list, as people employed in lower- to middle-wage industrial jobs often fall into the three-star rental demographic pool. Areas south of Atlanta, such as Henry County, South Fulton, Clayton County and Southeast DeKalb, all benefit from the region’s booming industrial sector, as do greater Ontario and Riverside County-Temecula in the Inland Empire.

But not all of the top submarkets are squarely in the country’s southern high-growth region. South Lake County, a suburban submarket of Chicago located in Indiana, ranked second among all submarkets for rent growth over the past year. Northwest Indiana has seen strong population growth as Illinoisans flee the higher taxes while maintaining access to the commuter rail available into Chicago, said Brandon Svec, CoStar’s director of analytics for Chicago. The submarket’s low vacancies have given landlords confidence to push rents more than 12% over the past year.

As for the bottom 20, the biggest standout here is the sheer number of submarkets in the Bay Area that fell into this category. Of the 20 worst submarket performers in terms of rent growth, 12 are located in the broader San Francisco, San Jose and East Bay markets. This shouldn’t come as too much of a surprise due to the region’s poor performance amid the pandemic. Expensive markets have seen consistent outflows of households over the past few months, as white-collar workers with the option to work from home seek larger, and cheaper, housing.

Most of the other areas include downtown or core-urban nodes such as Downtown Chicago and Downtown Seattle, Midtown New York, and pricey Northern Virginia neighborhoods such as Rosslyn, Ballston and Crystal City.

These areas have been developer favorites in recent years. The bottom 20 rent growth areas collectively delivered 3.4% of total inventory over the past 12 months and have 7.2% of inventory currently under construction. Both figures are above the national average.

Unlike the top performers, the underperforming submarkets are all some of the most expensive regions in their respective markets. Each submarket’s average rents are more than $2,000 per month, or in the top 10% of rents across the country. Most of the residents that had been living in these pricey locales have had the ability to work from home.

With no end of the pandemic in sight, renters have opted to avoid being locked into expensive leases, instead moving to places such as Dallas-Fort Worth, Phoenix and Boise, Idaho.