Apartment concessions are increasing in the nation’s most expensive markets. The coronavirus pandemic has undoubtedly put pressure on the apartment market, and many metros are seeing an increase in concessions as a result. However, metros with higher rent levels and also more construction are seeing a substantially higher increase in concessions than lower priced metros, according to research from Fannie Mae.
New York currently has the highest concessions in country. This year, concessions in the market have increased from 7.5% at the end of 2019 to 12.6%. San Francisco concessions are trailing New York at 11.3%, while Boston follows at 9.6%. Modestly priced markets, like Orlando and Phoenix, have seen a lower increase in concessions compared to last year and relatively low concessions overall. Orlando concessions increased from 5.3% to 6.6%, and Phoenix concessions have increased from 4.9% to 6.4%.
Fannie Mae notes that these markets have also seen the most new construction apartment deliveries this year. In 2020, 450,000 new apartment units have hit the market, but most of these units have been concentrated in 12 metros. New York, Washington, D.C., Los Angeles, Houston and Dallas have seen the largest number of new apartment deliveries, while Austin, Seattle, and Boston follow with slightly fewer units, and Orlando, Atlanta, Phoenix, and Miami complete the list of the top 12.
In terms of asset class, the most expensive apartments in the most expensive markets are seeing the highest concessions. In addition, luxury apartments have been the most common new-construction asset class. At the end of 2019, class-A apartment concessions were 7.2%, and by August 2020, they have increased to 9.2%. This market segment has also seen the most new construction activity. This year, 246,000 units have already been completed and another 204,000 units are scheduled for completion this year. As a result, class-A concessions should continue to rise.
Class-B and class-C asset classes have also seen an increase in concessions, but not to the same extent as class-A apartments. Likewise, these apartments are generally part of the older building stock, not new construction. Class-B concessions increased from 5.5% in 2019 to 7.2% in August 2020. Class-C apartments, on the other hand, have increased from 5.6% at the end of 2019 to 6.8% in August 2020. The increases in concessions began in April, after the start of the pandemic.
The rising concessions in class-A apartments, however, could be an indicator for the rest of the market. As class-A concessions increase, it will put pressure on class-B and class-C assets to do the same. As a result, Fannie Mae is anticipating rising concessions across asset classes in markets with high rates of new apartment deliveries. The report also suggests that as the market unfolds over the next 12 months apartment demand will increase in step with job gains.