RealPage's Greg Willett

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RICHARDSON, TX—Across the 100 largest metro areas in the US, theasking rent gap between the top end and the bottom layer of theapartment market has widened to the point where it's essentiallydoubled, RealPage Inc. chief economist Greg Willett blogged earlierthis month. Specifically, Willett wrote, “the most expensive classA product now rents for $1,663 per month on average, basicallydouble the average $850 monthly rents for the lower priced class Cproperties.”

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The gap is even greater on both coasts, and most especially inthe Northeast. Boston's class A rentals ask an average of $3,148per month, nearly triple the $1,1168 average for C product. It's alittle less steep in the New York City metro area, but only by afew percentage points. GlobeSt.com sounded out Willett for hisinsights on what's driving the stratification, and how rent growthis likely to progress in the next year or two.

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GlobeSt.com: We're seeing an especially pronouncedgap between class A and class C asking rents in the Northeast,although it's wide on both coasts. What's behindthis?

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Greg Willett: The biggest influence onthe disparity in the Northeast is the age of the stock. A verysizable share of the stock in the Northeast came on decades ago,and logically those are going to be comparatively affordableproperties compared to what you'll find in the Sunbelt markets.There's a difference in product, and because the Northeast markethas been built out for so long, any new development is going to beon an infill or on a tear-down site, and so it's going to be veryexpensive land that you're building on.

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GlobeSt.com: Conversely, then, when we look at theWest Coast markets, even if it's class C it's almost certainlygoing to be newer product.

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Willett: Yes, although not like whatyou'll see in the South or in Texas, where the class C is going tobe drastically newer. If you're looking at Seattle or SanFrancisco, it's going to be a little bit newer than you'll find ina Boston or a New York.

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GlobeSt.com: In terms of the effects on renters inany of these markets, does this gap between class A and C tend toskew their options? Or do renters in, say, New York have somewhatgreater pricing power due to greater income, so that theaffordability gap isn't as wide as it may seem?

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Willett: Obviously when you get intothese coastal markets, you tend to have higher incomes than you doin the middle of the continent. To some degree, that influences thegeneral affordability. But at the same time, the differences inincome are not as big as the differences in housing price. It's abigger stretch to afford the housing on the coasts, even takinginto account those differences in income.

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GlobeSt.com: As we move away from the coasts andinto markets that have experienced strong rent growth, has the gapbetween class A and class C also been widening in recentyears?

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Willett: It's fair to say that thedifference has widened in virtually every metro area. It really hasto do with where you build it. If you build more of the product inthe urban core, and even when you're in the suburbs if you buildproduct that is more dense with garage parking, you inherentlydrive up the pricing of everything. We're not just finding that inselect metros—we're finding that in virtually every market acrossthe country.

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GlobeSt.com: Do you anticipate that by 2018, the gapwill begin to widen at a slower rate than we've seen in the pastfew years?

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Willett: In a lot of places, we'realready getting to that point in the cycle where we're slowing downthe rent growth rate at the top end of the marketplace. That justreflects the amount of product coming on line and the morecompetitive leasing environment for class A communities as weincrease that new supply. For the foreseeable future, that gap isprobably as big as it's going to be; we'll probably see slowergrowth at the very top of the end of the market but continue topush pretty aggressively in the middle and bottom end of themarket.

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RealPage's Greg Willett

|

RICHARDSON, TX—Across the 100 largest metro areas in the US, theasking rent gap between the top end and the bottom layer of theapartment market has widened to the point where it's essentiallydoubled, RealPage Inc. chief economist Greg Willett blogged earlierthis month. Specifically, Willett wrote, “the most expensive classA product now rents for $1,663 per month on average, basicallydouble the average $850 monthly rents for the lower priced class Cproperties.”

|

The gap is even greater on both coasts, and most especially inthe Northeast. Boston's class A rentals ask an average of $3,148per month, nearly triple the $1,1168 average for C product. It's alittle less steep in the New York City metro area, but only by afew percentage points. GlobeSt.com sounded out Willett for hisinsights on what's driving the stratification, and how rent growthis likely to progress in the next year or two.

|

GlobeSt.com: We're seeing an especially pronouncedgap between class A and class C asking rents in the Northeast,although it's wide on both coasts. What's behindthis?

|

Greg Willett: The biggest influence onthe disparity in the Northeast is the age of the stock. A verysizable share of the stock in the Northeast came on decades ago,and logically those are going to be comparatively affordableproperties compared to what you'll find in the Sunbelt markets.There's a difference in product, and because the Northeast markethas been built out for so long, any new development is going to beon an infill or on a tear-down site, and so it's going to be veryexpensive land that you're building on.

|

GlobeSt.com: Conversely, then, when we look at theWest Coast markets, even if it's class C it's almost certainlygoing to be newer product.

|

Willett: Yes, although not like whatyou'll see in the South or in Texas, where the class C is going tobe drastically newer. If you're looking at Seattle or SanFrancisco, it's going to be a little bit newer than you'll find ina Boston or a New York.

|

GlobeSt.com: In terms of the effects on renters inany of these markets, does this gap between class A and C tend toskew their options? Or do renters in, say, New York have somewhatgreater pricing power due to greater income, so that theaffordability gap isn't as wide as it may seem?

|

Willett: Obviously when you get intothese coastal markets, you tend to have higher incomes than you doin the middle of the continent. To some degree, that influences thegeneral affordability. But at the same time, the differences inincome are not as big as the differences in housing price. It's abigger stretch to afford the housing on the coasts, even takinginto account those differences in income.

|

GlobeSt.com: As we move away from the coasts andinto markets that have experienced strong rent growth, has the gapbetween class A and class C also been widening in recentyears?

|

Willett: It's fair to say that thedifference has widened in virtually every metro area. It really hasto do with where you build it. If you build more of the product inthe urban core, and even when you're in the suburbs if you buildproduct that is more dense with garage parking, you inherentlydrive up the pricing of everything. We're not just finding that inselect metros—we're finding that in virtually every market acrossthe country.

|

GlobeSt.com: Do you anticipate that by 2018, the gapwill begin to widen at a slower rate than we've seen in the pastfew years?

|

Willett: In a lot of places, we'realready getting to that point in the cycle where we're slowing downthe rent growth rate at the top end of the marketplace. That justreflects the amount of product coming on line and the morecompetitive leasing environment for class A communities as weincrease that new supply. For the foreseeable future, that gap isprobably as big as it's going to be; we'll probably see slowergrowth at the very top of the end of the market but continue topush pretty aggressively in the middle and bottom end of themarket.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.

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