During the pandemic, household formation soared and people sought more ideal remote working environments, which drove demand for housing, both owned and rented. In the apartment rental market, vacancy rates for all types of apartments declined in the second half of 2020 and through most of 2021, reflecting heightened demand.
However, the declines in vacancy rates were not equally distributed across unit quality. Notably, vacancy rates for Class A (luxury) apartments have declined more sharply than for Class C properties, which tend to be older, not as well-located, and lacking amenities compared with Class A, and Class B properties, which are in between the two. Class A vacancy rates fell from 12 percent in the second quarter of 2020 to a low of 7 percent by the end of 2021. In contrast, before the pandemic, Class A vacancy rates had been trending upward. During quarantine, people wanted nicer, higher-end units with more space.
Demand for Class A Apartments Falls, While Supply Rises
Now, with inflation eroding consumers’ purchasing power and as household formation slows, vacancy rates are trending up. Vacancy rates for Class A and Class B apartments are rising faster than for Class C. Demand for higher quality apartments appears to be softening, while demand for more affordable housing remains robust.
On the supply side, there are a record number of apartment units currently under construction, and approximately 75% of them are mid- and high-rise buildings that are comprised largely of higher-end unit mixes. As more of this high-end stock comes to market, vacancy rates for Class A and higher end Class B units will likely continue to increase.
Expect Downward Pressure on Luxury Apartment Prices in 2023
Many potential home buyers were priced out of the purchase market during the pandemic as house prices soared, supply remained limited and, more recently, as mortgage rates surged. Many potential buyers could afford the monthly expense associated with a mortgage but didn’t have sufficient funds saved for the down payment. This drove many would-be buyers into the higher-end rental market. Now, it appears that some of those households are being priced out of the Class A apartment market as well. With demand softening and supply increasing for Class A apartments, renters may find some discounts for luxury apartments next year.