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Operations Moves to the Forefront in 2018

rent gap between A and B apartments

By Les Shaver

The rent gap between A and B apartments is widening in many markets. But regardless of the asset class, management will take on a greater importance if things slow.

The difference between Class A and B apartments continues to grow in many markets around the country.

In the early 2000s, there was a difference of about $2,500 in annual rent between A and B apartments. That gap today has ballooned to about $6,000.

That there is a large gap between A and B rents does not mean the lower end of the market is struggling.

“The strongest growth during the past seven years has been at the lower end of the market,” says Jeff Adler, Vice President, Yardi Matrix, during the NMHC Apartment Strategies Conference in January in Orlando, Fla.

That rent gap between A’s and B’s varies based on metro area. Boston and New York show the widest gaps at $1,170 and $1,078, respectively.

“This gives owners of B assets the cushion to raise rents without pushing to A’s,” Jay Lybik, Vice President of Research at Marcus & Millichap, says.

On the other hand, in markets like Las Vegas and Phoenix, the gap is only about $147 and $230, respectively.

“We continue to see residents bridging the gap in those markets,” Lybik said. “[The small gap] sets up the situation where the A’s and B’s have interplay].”

Even in markets where the gap is too wide for residents to move up from B to A, a slow-down trend hits everyone.

“Some softness in A’s [in some markets] is showing up in the B’s and C’s,” Willett says.

Regardless of the asset class, Adler sees a slowing market.

“Most major markets have had some level of absorption problem at the upper end,” he says. “There are still some bright spots for near-term rent growth, but they are largely defined by being a ‘fringe’ market riding off high rents in nearby markets.”

In the past, investors could enjoy success by simply choosing to buy assets in a market on the upswing. As growth slows, that will change.

“Operational efficiency will become a bigger factor in overall return in the next couple of years,” Willett says.

“You will have to increase returns by cutting expenses or by finding an angle or a good neighborhood in which to buy a property,” Adler said.