The Evolving Landscape of Apartment Affordability in 2023: Not All is as it Seems

The Remarkable Surge in Renter Incomes Since 2020

A pivotal trend that has emerged in recent years is the significant rise in renter incomes. Since 2020, renter incomes have experienced a notable surge. Data from the "RealPage Market-Rate Apartment Affordability Study 2023 Update" showcases this trend vividly. In 2020, the median household income for renters in market-rate apartments was hovering around the $60,000 mark. Fast forward to 2023, and this figure has seen a substantial increase, approaching the $80,000 threshold. 

For real estate investors, especially those eyeing multifamily Class B assets, this rise in renter income signifies an opportunity. With current mortgage rates surging above 7%, renters having a higher disposable income will likely stay the course, and the demand for properties that offer a blend of comfort, convenience, and luxury are precisely what Class B assets provide.

The Rising Star: Apartment Affordability for Multifamily Class B Assets

1. A Sweet Spot in Affordability: While the national median rent-to-income ratio has surged to 23%, multifamily Class B assets present a unique proposition. These assets strike a balance, offering rents that are neither too high nor too low. Specifically, the average rent for Class B properties stands at a competitive $1,776 as of 2Q23.

2. Stellar Vacancy Rates: One of the hallmarks of a promising real estate investment is its vacancy rate. Class B assets shine in this department, boasting a 5-year average vacancy rate of just 4.1%. This is a testament to their consistent demand and the value they offer to renters.

3. Inversely Correlated with Affordability: An intriguing observation from the study is the inverse correlation between apartment property class and affordability. As we move from Class A to Class C, there's a noticeable decrease in the median rent-to-income ratio. This trend underscores the appeal of Class B assets, which offer a middle ground in terms of both price and quality.

Why Investors Should Continue to Bet Big on Class B

• Consistent Demand: The steady demand for Class B assets, as evidenced by their impressive vacancy rates, suggests that they cater to a significant segment of the population. These properties offer a blend of affordability and amenities that resonate with a broad audience.
• Room for Value-Add Opportunities: Class B properties often present opportunities for upgrades and renovations. Investors can enhance these assets, potentially increasing rents and overall property value.
• Resilience in Market Fluctuations: Class B assets tend to be more resilient during economic downturns. Their mid-range pricing appeals to a wide demographic, ensuring consistent occupancy even in challenging times.

5 Key Takeaways

1. Dynamic Real Estate Market: The real estate market is continuously changing, influenced by socio-economic factors. It's vital for investors to stay informed about these shifts.

2. Renter Incomes on the Rise: Since 2020, there has been a significant increase in renter incomes. In 2020, the median household income for renters was around $60,000, but by 2023, it has approached the $80,000 mark.

3. Factors for Income Growth: The increase in renter incomes is attributed to the economic recovery post-pandemic, wage growth in specific sectors, and a shift in the demographics of those choosing to rent.

4. Opportunity for Investors: The rise in renter income presents an opportunity for real estate investors, especially in the multifamily Class B asset sector. With higher disposable incomes, renters are more inclined towards properties that offer comfort, convenience, and luxury.

5. Multifamily Class B Assets Highlights:

   - Affordability: Class B assets offer a balance in terms of rent, with the average rent being $1,776 as of 2Q23.

   - Low Vacancy Rates: These assets have a 5-year average vacancy rate of 4.1%, indicating their consistent demand.

   - Inverse Correlation with Affordability: There's a trend where as you move from Class A to Class C apartments, the median rent-to-income ratio decreases, making Class B assets appealing as they offer a balance in price and quality.

   - Steady Demand: Class B assets cater to a large segment of the population due to their blend of affordability and amenities.

   - Value-Add Opportunities: These properties often have potential for upgrades and renovations, allowing investors to increase the property's value.

   - Economic Resilience: Class B assets are more stable during economic downturns due to their mid-range pricing.

Final Thoughts

The 2023 landscape of the real estate market is rife with opportunities, and multifamily Class B assets stand out as a golden ticket for investors. In my opinion, their unique positioning in terms of affordability, consistent demand, and potential for value-add make them a compelling choice for those looking to maximize returns. As always, be sure to consult with your financial advisor and do your own due diligence before joining into any investment.