The Case for Class B Apartment Investment
By Donald Hall & Dan Manware, Nuveen Real Estate
Class B apartments are a step below Class A in terms of amenities, location and building quality. For these reasons, Class B units are more affordable with rents near $1,700 per month compared to $2,200 per month for Class A units. Although these properties may not be as aesthetically pleasing as their more upscale counterparts, for investors the modest Class B apartment subsector has outperformed Class A for the last decade. Structurally undersupplied with resilient demand from renters, this subsector is poised for continued outperformance in both the short and long term.
Demand for apartments of all quality levels has increased on an annual basis every quarter since 2000, not once turning negative. Although demand has been reliably positive, not many expected record levels amid the Covid19 pandemic. Apartment absorption reached a record of 301,000 units in 2020, which then quickly doubled in 2021 with 663,000 units absorbed nationwide.1 Initially, this demand was largely spurred on by the decoupling of roommates. Stuck at home, renters needed additional space to work remotely, and many had record bank account balances due to savings from reduced travel, a pause on student loan payments, federal stimulus checks and raises from employers. Although this level of demand growth may not be sustainable, the wave of new demand brought occupancies up to record levels, setting the stage for strong rent growth.