RICHARDSON, TX—Across the 100 largest metro areas in the US, the asking rent gap between the top end and the bottom layer of the apartment market has widened to the point where it’s essentially doubled, RealPage Inc. chief economist Greg Willett blogged earlier this month. Specifically, Willett wrote, “the most expensive class A product now rents for $1,663 per month on average, basically double the average $850 monthly rents for the lower priced class C properties.”
The gap is even greater on both coasts, and most especially in the Northeast. Boston’s class A rentals ask an average of $3,148 per month, nearly triple the $1,1168 average for C product. It’s a little less steep in the New York City metro area, but only by a few percentage points. GlobeSt.com sounded out Willett for his insights on what’s driving the stratification, and how rent growth is likely to progress in the next year or two.
GlobeSt.com: We’re seeing an especially pronounced gap between class A and class C asking rents in the Northeast, although it’s wide on both coasts. What’s behind this?
Greg Willett: The biggest influence on the disparity in the Northeast is the age of the stock. A very sizable share of the stock in the Northeast came on decades ago, and logically those are going to be comparatively affordable properties compared to what you’ll find in the Sunbelt markets. There’s a difference in product, and because the Northeast market has been built out for so long, any new development is going to be on an infill or on a tear-down site, and so it’s going to be very expensive land that you’re building on.
GlobeSt.com: Conversely, then, when we look at the West Coast markets, even if it’s class C it’s almost certainly going to be newer product.
Willett: Yes, although not like what you’ll see in the South or in Texas, where the class C is going to be drastically newer. If you’re looking at Seattle or San Francisco, it’s going to be a little bit newer than you’ll find in a Boston or a New York.
GlobeSt.com: In terms of the effects on renters in any of these markets, does this gap between class A and C tend to skew their options? Or do renters in, say, New York have somewhat greater pricing power due to greater income, so that the affordability gap isn’t as wide as it may seem?
Willett: Obviously when you get into these coastal markets, you tend to have higher incomes than you do in the middle of the continent. To some degree, that influences the general affordability. But at the same time, the differences in income are not as big as the differences in housing price. It’s a bigger stretch to afford the housing on the coasts, even taking into account those differences in income.
GlobeSt.com: As we move away from the coasts and into markets that have experienced strong rent growth, has the gap between class A and class C also been widening in recent years?
Willett: It’s fair to say that the difference has widened in virtually every metro area. It really has to do with where you build it. If you build more of the product in the urban core, and even when you’re in the suburbs if you build product that is more dense with garage parking, you inherently drive up the pricing of everything. We’re not just finding that in select metros—we’re finding that in virtually every market across the country.
GlobeSt.com: Do you anticipate that by 2018, the gap will begin to widen at a slower rate than we’ve seen in the past few years?
Willett: In a lot of places, we’re already getting to that point in the cycle where we’re slowing down the rent growth rate at the top end of the marketplace. That just reflects the amount of product coming on line and the more competitive leasing environment for class A communities as we increase that new supply. For the foreseeable future, that gap is probably as big as it’s going to be; we’ll probably see slower growth at the very top of the end of the market but continue to push pretty aggressively in the middle and bottom end of the market.