Back in 2019, our team looked for assets that were built in 2000 or after. In the apartment industry, the year a property was built typically drives what type of class assignment it gets. For example, a property built from 1980 to 2000 would most likely be a Class B asset. A property built after 2015 would most likely be a 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 might be classified as Class A.
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 include schools, grocery stores, access to healthcare providers, and infrastructure.
With our focus in 2019 on 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 journeyed forward and COVID-19 broke, presenting occupancy and rent collection challenges to the entire apartment industry. What we learned and witnessed was that Class A assets had more stable operations during 2020 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-19 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 . 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.”
Besides strong occupancy numbers, we are also seeing 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%.” 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.
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  was at $93,000.”
These are good indicators for us (and you) to expect stable and potentially better than expected performance of our assets.