Worst Markets for Free Rent Slowly Recover
Concessions and rent cuts, a vast majority of which were found at new buildings that were leasing-up during the pandemic, are quickly evaporating.
During the pandemic, desperate apartment managers offered as much as three months of free rent to lure renters to new, luxury towers in downtowns largely shut down by the coronavirus pandemic. That includes some of the most expensive apartment markets in the U.S., like New York City and San Francisco.
Those special offers of free rents are rapidly disappearing as businesses reopen and downtowns begin to revive after the pandemic.
“Concessions now are roughly half of what they were during the height of the pandemic,” according to Andrew Zola, Commercial Real Estate Analyst with CoStar Advisory Services.
The offers of free rent were much more modest throughout the rest of the U.S. – even at new apartment buildings that needed to fill hundreds of new units. That’s partly because property managers in the rest of the U.S. faced fewer challenges. But managers in fast growing areas like the Sun Belt have also learned other ways to lure prospective renters to sign leases – without always having to offer months of free rent.
“Property managers have gotten more sophisticated,” says Greg Willett, Chief Economist for RealPage, Inc., headquartered in Richardson, Texas.
Property managers cut rents nationwide during the pandemic
In the first months of the pandemic, much of the U.S. economy ground to a halt to slow the spread the coronavirus. The number of prospective renters shopping for apartments sharply declined. To get the attention of the few people still interested in signing new leases, property managers cut asking rents 3.4% year-over-year in Q1 2021, according to data from Reis, Inc. Effective rents (which include concessions) were also down 3.4%.
Those are “record declines for this property type, which has never displayed much volatility in rent growth at the national level,” says Victor Canalog, Chief Economist and Senior Vice President for Reis, Inc., headquartered in New York City.
Property managers offered the vast majority of these rent cuts and concessions at new buildings that were leasing-up during the pandemic.
The property managers of these new communities had to adapt to a sudden drop in the number of people signing leases. “Demand generally cooled to between 10 and 15 units leased per month,” says Willett. That’s roughly half of the typical lease-up rate before the pandemic. Demand for apartments had largely returned by June 2021. “Monthly lease-up rates now are typically back to 25 to 30 units a month in most places.”
“Rent discounts emerged largely across the board for those properties, with giveaways usually reaching at least a month of free rent,” says Willett.
Central business districts emptied out
Property managers offered the deepest rent cuts and concessions to fill new apartments in the most expensive, most damaged downtown markets like Manhattan and San Francisco.
“During the onset of the pandemic, there was an exodus of renters moving out of expensive and dense downtowns to the suburbs,” according to Jessica Morin, Senior Director of Market Analytics at Apartments.com.
The amount of free rent on offer varied widely, but three months or even four months was not unheard of.
In early summer 2020, nearly half (43%) of the available apartments in urban core neighborhoods offered some kind of rent giveaway, according to RealPage. Measured by properties, more than half (60%) of downtown apartment communities offered free rent for a least some of their apartments in November 2020, according to Apartments.com. In comparison, less than a third (30%) of suburban apartment properties offered free rent.
These downtown apartment markets have already begun to recover – though free rent is still common and rents are still low.
“With the increase in vaccinations, we have seen renters returning to downtowns, lured by the reopening of walkable amenities and those generous concession packages,” Morin says.
Effective rents (including concessions) for new leases in these downtown neighborhoods were down by an average of about 15% in June 2021 compared to rates in early 2020. Given these are expensive locations, with average rents of roughly $3,000 a month, that’s a typical drop of about $450, according to RealPage.
“The typical discount is around 10%, or a little more than five weeks of free rent, but it’s not unusual to see discounts equaling two months or more of free rent,” says Willett.
These downtowns are very small geographic areas that are inside or very close to the central business district of a city. Developers opened nearly a third of their new apartments in these very small, downtown submarkets in recent years, and the stress had already begun to show even before the pandemic, according to economists. In the year before the pandemic, apartment rents were already growing more quickly in suburban areas (which include the rest of the metro area outside of these small downtowns), according to RealPage.
These downtowns had been highly desirable places to live before the pandemic, close to jobs and entertainment. The percentage of apartments in these gateway metro urban cores that were occupied before the pandemic was an average 95.9%, despite all of the new units opened by developers, according to RealPage.
That’s higher than average occupancy rate overall of the U.S. by close to a percentage point.
Downtown apartments located in leading, gateway metro areas also benefited from very strong job growth. During the decade before the pandemic, the San Francisco metro area produce more than three jobs for every housing unit developers were able to build. The New York/Newark/ Jersey City metro area produces more than two jobs for every housing unit, according to the Manhattan Institute.
During the pandemic, many of those workers could work remotely while living in a less expensive part of the metro area or even a different city altogether. “Working from home made larger units more attractive, providing a push for renters to move away from small units in deeply urbanized areas,” says CoStar’s Zola.
Average occupancy in gateway metro urban cores was down to an average of 92.5% in June 2021, according to RealPage.
“Progress will occur over the next year or so, but it’s going to take a while to get occupancy rates back to normal, given the size of the hole created over the past year,” says Willett. He predicts that the average occupancy rate in gateway metro urban cores won’t climb back to roughly 96% until the middle of 2023.
“Work from home will likely continue to some extent, and this will likely cause elevated vacancies to persist, causing owners in these metros to continue offering concessions,” says Zola.
Older apartments didn’t need to offer free rent
Across the U.S., new, luxury apartment properties were generally the only ones that needed to offer rent concessions.
“In turn, newer buildings with higher rents had more trouble leasing-up than more affordable units,” says Zola.
In contrast, many stabilized apartment buildings were fully occupied by residents, even in the worst days of the pandemic. In first quarter of 2021, even with thousands of new cases of coronavirus being diagnosed every day across the U.S., 94.7 %of U.S. apartments were still occupied, according to Reis.
Property managers at stabilized properties did not have to offer much to rent the few apartments that became available from turnover. Only 16% of the apartments available at stabilized properties offered free rent, even in May and June 2020, in the early months of the pandemic. That share is inching down now, falling to about 12% in May 2021, according to RealPage.
Property managers often did not have to offer free rent at all if their properties were stabilized in places with strong job growth and very little new apartment construction. For example, in the smaller cities of Riverside and Sacramento, Calif., Virginia Beach, Va., and West Palm Beach, Fla., property managers only offered concessions at a handful of apartments in May 2020, says Willett.
Less free rent thanks to revenue management systems
Property managers were much more likely to offer concessions during the recession of 2008 and 2009, when free rent was offered on as much as 55% of the available apartments, according to RealPage. That’s three times the share of apartments that offered free rent across the U.S. during the pandemic.
“There’s some strong evidence that rent giveaways don’t play nearly the role they did previously,” says Willett. “Adoption of revenue management systems absolutely has played a role in that shift.”
Revenue management software systems suggest the amount of rent that managers should ask for each apartment based on the features of the apartment and the latest available market data. These systems typically lower monthly rents for the life of the lease, rather than offering months of “free rent.”
“Use of revenue management systems is much more common today than in 2008-2009. Those systems generally will trim rents with a scalpel, rather than a machete,” says Willett.
Leasing agents in the Sun Belt were used to competition
There is another reason why property managers in once-hot, downtown apartment markets had to offer more free rent to fill their new, empty apartments. They hadn’t as much practice dealing with competition from other new apartment communities.
With more land available to build, leasing agents in the Sun Belt are already used to selling apartments to renters who many other communities to choose from. “Lots of construction in those markets leads to competitive leasing environments virtually all the time,” says Willett. “It’s become normal to approach demand generation from multiple angles in the Sun Belt.”
These managers may spend more on promotion overall and direct their staff to spend more time following up with potential renters. They may also customize marketing plans for individual properties or even particular floorplans to concentrate on attractive features that may not be getting the attention they deserve from potential renters.
These may seem like obvious tactics, but in many gateway markets before the pandemic, leasing agents had not needed to worry. The percentage of apartments occupied before the pandemic tended to be a few percentage points higher and the balance of power was tilted toward owners.
“They just don’t have as much experience scrambling to attract renters,” says Willett. “In the gateway markets that suffered the biggest difficulties in 2020—those are the locations where property operators tend to be overly reliant on price cuts to support leasing activity.”
Bendix Anderson is a freelance writer.