When the multifamily market’s history is written, the year 2020 will shape up to be a tale of two cities — or at least a tale of two types of cities. Gateway markets (Boston, Chicago, Los Angeles, New York, San Francisco, Washington, D.C., specifically their urban cores) have seen some of the worst performance and sharpest declines in fundamentals in recent history. COVID-19 has forced businesses, restaurants and cultural gathering locations to close, and thus keep individuals at home for long stretches of time.
As a result, many gateway market households have been challenged due to high rents, limited space and the inability to enjoy the community amenities that were the reason many people moved there in the first place. At the same time, secondary markets, tertiary markets and suburban areas of larger cities have performed reasonably well in 2020, even as the pandemic and subsequent recession has been far-reaching geographically and across employment sectors. Of the more than 100 markets tracked by Yardi Matrix, the best-performing markets during the pandemic have been:
- Small southern and southeastern markets that continue to see strong domestic migration, which has translated into positive rent growth and occupancy rates
- Secondary and tertiary markets in relative proximity to major gateways, where easy and fast relocations have occurred
- Suburban locations within larger markets, as people desire more space and cheaper rents, without leaving their metro area
SECONDARY MARKET OUTPERFORMANCE
Among the 30 largest metros in the United States, Sacramento, the Inland Empire, Phoenix and Las Vegas have been the year’s best performing markets, as rents have increased between 2 percent and 6 percent year-over-year through October. Many of these markets were among the leaders in rent growth pre-pandemic, as the trend of outmigration from California began a few years ago. Even so, the migration accelerated in 2020.
One major difference between pre-pandemic and today, however, is the magnitude at which these secondary markets are outperforming. With rare exceptions — such as Houston in the wake of Hurricane Harvey — virtually all of the top 30 metros have experienced positive rent growth continuously since 2013. Secondary markets generally had higher growth rates, but the difference was marginal, a few percentage points. Now the delta between gateway and secondary markets has widened to more than 15 percent between the best- and worst-
That’s not entirely surprising. Markets with more expensive rents tend to get squeezed more in recessionary periods, and the huge jump in unemployment has exacerbated that trend. In the metros with the highest year-over-year rent growth, the average rent accounts for between 50 percent and 70 percent of the average rent in metros with the highest rents, such as Los Angeles, New York City or San Francisco. More than 50 million unemployment claims have been filed since March, and the U.S. was down roughly 10 million jobs from its peak as of October. People become more sensitive to costs of living when they lose jobs or confidence in the economy.
Many workers in service industries who have lost their jobs or seen their hours substantially cut have had difficulty making rent payments and, as a result, chosen to relocate. On the opposite end of the wage scale, many high-earning employees, who have worked from home for the better part of 2020, have relocated and continued to work remotely, benefiting from lower costs of living, and at times larger and less dense living situations.
Las Vegas is a particularly interesting example. Despite the metro’s heavy dependency on tourism to drive the economy, and a significant loss of jobs in the leisure and hospitality industry (the metro lost 12.4 percent of its employment between March and September), rents have continued to increase. Despite the significant unemployment, the metro has benefited from population growth from Californians who are attracted by cheaper Las Vegas rents and can handle a 4 percent to 5 percent increase.
SMALLER MARKETS GAINING
Drilling down to smaller markets, some of the best performing are those in close proximity to major out-migration markets in the Northeast and mid-Atlantic. Portland, Maine; Richmond, Va.; and Scranton-
Wilkes Barre, Pa., have all experienced at least 5 percent rent growth year-over-year through October. While these markets may not be considered commuter markets to their larger gateway neighbors, they offer more affordable housing without leaving residents of Boston, New York, Philadelphia or Washington, D.C., too far from their hub city.
Other tertiary tech hubs such as Boise and Huntsville, Ala., have emerged as relocation havens for tech professionals leaving large markets. Boise has been one of the faster growing rental markets over the past three years, and despite having deliveries equal to 6.5 percent of existing stock over the past 12 months, rents are still up 8.1 percent year-over-year.
The gateway markets, on the other hand, have been consistently the lowest performing markets this year. All six gateway markets ranked in the bottom 10 nationwide for year-over-year rent growth in October, led by New York City (–10.0 percent) and San Francisco (–8.2 percent).
Urban core submarkets have performed particularly poorly relative to their suburbs. For example, urban Chicago rents fell 6.5 percent year-over-year through October, while rents in the Chicago suburbs increased 1.5 percent in the same period. Other metros share a similar story in terms of rent growth year-to-date through October. In Atlanta, rent growth in the suburbs outgained the urban core by 4.1 percent. Suburban Twin Cities rents are up 1.9 percent compared to a 0.6 percent decline in the urban core, and Dallas rents were 2.5 percent higher in the suburbs than in uptown.
Declines in rent have followed weaker demand as residents leave expensive gateway metros for outer ring suburbs and smaller and lower-cost markets. Suburban and secondary market occupancy rates have increased over the past eight months, while urban core occupancies have declined precipitously. Urban submarkets in Chicago, New York City and San Francisco have all seen occupancies drop by more than 5 percent since the start of the pandemic.
The $64,000 question is whether we are seeing the inception of a permanent change or whether demand will revert back toward gateway markets once concerns about COVID-19 diminish. Most downtown office buildings remain largely vacant as corporations allow employees to work from home, and it remains unclear when or if office towers will again teem with activity. If employees do not have to commute into cities regularly, they could decide they don’t need to be within the city limits.
Some relocations are sure to be temporary, as some city-loving residents will go back to the urban core as soon as COVID-19 is under control, vaccines are readily available and local gathering spots are able to reopen. The longer the pandemic persists and the more comfortable people become in new markets or suburban areas, the more likely it is that people will stay. Working remotely is likely to remain at least in some form following the pandemic, and the desire for space and comfort over density, entertainment and excitement that comes with a gateway market may result in 2020 being a seminal moment for the housing industry.
Chris Nebenzahl is editorial director at Yardi Matrix, and Paul Fiorilla is the company’s director of research.