CoStar Analysis: Smaller Apartments Gaining Significant Traction as Renters Accept Rent-Location Trade-off
JULY 24, 2019|ROBIN TRANTHAM AND JOSEPH BIASI
Demand for rental housing once again outpaced supply in the first half of 2019 after climbing to a record high a year earlier. The last year and a half has capped off a strong cycle in U.S. rent growth, with the average apartment rent level now sitting 24% above its prerecession high.
This cycle’s historically strong rent growth has largely come at a time when student debt levels have ascended quickly to $1.49 trillion, and many millennials are choosing to get married later in life. Additionally, average rents across the nation have grown by more than 4% per year, while household incomes have grown by an average of 2.9% per year.
Due in large part to these growing financial burdens, together with recent job creation primarily occurring in major metropolitan areas, and changing societal trends, many renters this cycle have chosen to sacrifice square footage and lease smaller apartments in order to move to their desired location. As a result, smaller apartments have largely outperformed larger units throughout this cycle.
The average vacancy rate for the smallest quartile of one-bedroom apartments has descended by around 40 basis points since 2015 to around 5.1%, 30 basis points below that of the largest quartile of one-bedrooms. While smaller apartments have continued to benefit from an outsized share of demand, the average vacancy rate in larger one-bedroom apartments has actually remained rather flat over the past few years. These smaller apartments present prospective renters with a more financially feasible way of living where they desire to live.
This trend is exaggerated further when looking solely at urban areas within core metropolitan areas. Within these core urban submarkets, which include Boston, New York, Chicago, L.A., San Francisco, Washington D.C., and Seattle, average vacancy among the smallest quartile of one-bedroom apartments has descended by 120 basis points since 2015, while the average vacancy rate for the largest quartile has only descended by around 50 basis points over that period.
As the average apartment rent for the higher quality 4 and 5 star properties in these urban submarkets has now climbed to nearly $2,500 per unit, representing a 46% premium over the average suburban rent per unit, smaller apartments within these urban cores have begun to garner significant attention from renters this cycle.
This increased demand for smaller units, coupled with a general motivation among developers to maximize the number of units per building, has resulted in a significant decrease in the average size of apartments constructed in a selection of major metropolitan areas over the past 10 years.
One-bedroom units, which accounted for roughly 58% of units constructed in 2018 and have become increasingly prevalent in new developments this cycle, have experienced the largest size decrease out of all unit types. The average size of one-bedroom apartments constructed in 2018 was 755 square feet, down a cumulative 6.5% from 2007’s average of 800 square feet.
Within urban submarkets, one-bedrooms have experienced an even sharper size decline of 9.4% over the course of this cycle, 720 basis points greater than for those located in suburban areas.
The considerable decline in the average size of apartment units within the country’s major urban regions has largely been driven by those located in the more expensive East Coast and West Coast markets this cycle. One-bedroom apartments constructed from 2016 to 2018 in major East Coast urban submarkets averaged 723 square feet, accounting for a cumulative 9.2% size decrease relative to those constructed from 2006 to 2008.
Urban one-bedroom apartments in Philadelphia and Baltimore experienced the largest size declines out of those in all other major metros over this period at 21% and 15%, respectively. One-bedroom apartments in West Coast urban submarkets also experienced a sizable decline of 6.7% over this period. Those in the lower-cost Midwestern and Southern urban submarkets have undergone relatively smaller decreases of 5.8% and 5.5%, respectively, throughout this cycle.
Even with nearly 540,000 new apartment units currently under construction within the top 54 major U.S. metropolitan areas across the country, rent growth is projected to average around 2.3% annually, 20 basis points higher than the long-term average.
As rent levels continue to increase in many major metropolitan areas across the country, and as these areas continue to benefit from outsized population growth relative to the nation as a whole, renters who desire to live in a major city will likely continue to seek out smaller apartments that will allow them to do so.
Robin Trantham is a consultant and Joseph Biasi is an analyst with CoStar Market Analytics in Boston.
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Article by CoStar