Target Focus
Back in 2019, our team started to look for assets that were built in 2000 or newer. In the apartment industry, the year in which a property was built typically drives what type of class assignment it gets. For example, a property built around 1980-2000 would most likely be a class B asset, and if a property was built after 2015 it would most likely be class A. There is some variability to this general breakdown. For example, if you have a 2000 built asset that completed extensive renovations in 2020 it could be a class A apartment community.
In addition to looking for newer built assets in 2019, we also focused on great areas of select markets that have solid economic indicators. The economic indicators we look for when targeting a specific sub-market are population growth, job growth, diversity of employers, and market amenities which includes schools, grocery stores, access to healthcare providers, and infrastructure to name a few.
With our focus in 2019 looking for newer assets in great locations we naturally acquired class A properties or class B assets that we could renovate into class A apartment communities. This strategy worked out well for us as we encountered COVID in 2020 and global economic uncertainty in 2022. These health and economic pressures presented occupancy and rent collection challenges to the entire apartment industry. What we learned and witnessed from markets we invest in was that class A assets had more stable operations during 2020, 2021, 2022, and even in early 2023 compared to class B or class C assets.
2021 and Beyond
As we progressed into 2021, class A assets were the first asset type to regain pre-COVID occupancy and collection numbers. Class A assets were also the first asset type to be able to push rental rate increases without negatively impacting occupancy. According to national information by RealPage, Inc. “Occupancy in the Class A product stock improved to 95.5% in May [2021]. That’s the strongest occupancy rate seen for this segment of the nation’s apartment inventory since October 2019, and it’s a big jump from June 2020’s low-point performance of 93.9% occupancy. On average, occupancy in Class A properties ran right at the 95% mark over the course of the past decade.”
In addition to strong occupancy numbers, we also saw positive annual rent growth numbers for Class A apartments in 2021 with good indications to have rental rate increases continue in the years to come. According to RealPage, Inc. “Effective asking rents for Class A units are now rising at a year-over-year pace of 4.7%”. During 2021 and 2022 class A assets in our markets saw organic annual rent growth rates around 10% which has not occurred in many years. This is a good indicator for the future performance of our apartment communities because we conservatively underwrite for about a 3.25% annual rent increase.
In order to support rental rate increases we also want to have employment growth for our residents. According to RealPage, Inc. “Job counts in high-paying employment sectors like Professional Services, Finance and the tech-heavy Information category are close to or even above pre-pandemic levels in many metros. [The] median annual income for a household leasing a Class A unit in May [2021] was at $93,000.” These are good indicators for us to expect stable and ideally better than expected performance of our assets.
