Another well put together and researched article from Jay Parsons.
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There is no such thing as “Class B/C” apartments. It’s uselessly broad. It’s like combining Chipotle and Taco Bueno into a single category. And it matters because, in many markets, Class B might be better positioned than Class C into the next cycle.
If a broker or property owner calls an apartment property “B/C,” it’s probably a C.
If a property’s rent are consistently in the bottom quartile of the market, it’s probably a C. (The market tells you what you are.)
Asset classification can be subjective, yes, but you have to draw the line somewhere. And this may matter more into the next cycle, especially in higher-supplied markets, as the gap between Class B and Class C could further widen.
Why? Four reasons:
1) Supply. Renters today have a lot of options, especially in the Sun Belt and Mountain regions. In those spots, Class B is quite affordable even to moderately lower-income renters. We’re seeing a filtering effect where renters are moving up market, triggering elevated Class C vacancy in those MSAs. Don’t assume cheaper rents = higher demand because, in recent years, there’s been a flight to quality … not a flight to affordability. Weaker demand leads to deeper rent cuts. While rent cuts have moderated (or evaporated) in Class A and B within higher-supplied markets, they remain consistently deep in Class C.
2) Immigration. It’s a bigger factor for Class C price points. It was a tailwind earlier in this decade. Now it’s a major headwind. Recent immigrants tend to favor older, cheaper rentals in lower-cost neighborhoods, as John Burns research shows. It’s far less of a factor in the upper half of the market.
3) Affordability. Class C rents are lower, yes, but so are incomes. That means more price sensitivity. We also see rent collections tend to be lower in Class C. Conversely, the Class B is more likely to cater to “essential” middle-income workers, many in relatively stable job sectors that are less impacted by AI — teachers, nurses, firefighters, etc.
4) Deferred maintenance. Class C apartments are more likely to be older deals with significant deferred maintenance needs, and there’s not a lot of capital pursuing those types of deals right now — especially in lower-tier submarkets where Class C apartments tend to cluster together. In a higher-rate environment, major value-add work is more challenging.
Having said all that, there are always exceptions. Every deal stands on its own merits. Two categories I’d watch for:
a) Class C deals in lower supplied markets, particularly those with healthy rent rolls and less deferred maintenance needs. Notably: Class C rents have consistently and steadily grown in low-supplied markets, while falling in high-supplied areas.
b) Class C deals in upper-income submarkets. The “cheapest apartment in the higher-cost neighborhood” strategy.
For those interested, I went into much more depth on the Class B vs. Class C story in my latest newsletter linked in the comments.
Other thoughts?
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