Class C apartments get cheaper when there's a lot of new "luxury" Class A apartments

Housing is a ladder, it's all connected

Jay Parsons on Twitter:

When you build "luxury" new apartments in big numbers, the influx of supply puts downward pressure on rents at all price points -- even in the lowest-priced Class C rentals. Here's evidence of that happening right now:

There are 21 U.S. markets where Class C rents are falling at least 4% year over year. What is the common denominator? You guessed it: Supply. Of those, all but one have supply expansion rates ABOVE the U.S. average.

There's no demand issue in any of these 12 markets. They're all among the absorption leaders nationally -- places like Austin, Phoenix, Salt Lake City, Raleigh/Durham, Atlanta, Tampa, Dallas, Charlotte, Orlando, etc. But they all have a lot of new supply.

Simply put: Supply is doing what it's supposed to do when we build A LOT of apartments. It's a process academics call "filtering." New pricey apartments are pulling up higher-income renters out of moderately priced Class B units, which in turn cut rents to lure Class C renters, and on down the line it goes.

Lest anyone is still in doubt, here's another factoid: Where are Class C rents growing most? You guessed it (I hope!) -- in markets with little new supply. Class C rent growth topped 4% in 22 of the nation's 150 largest metro areas, and nearly all of them have limited new apartment supply.

Most new construction tends to be Class A "luxury" because that's what pencils out due to high cost of everything from land to labor to materials to impact fees to insurance to taxes, etc.

So critics will say: "We don't need more luxury apartments!"

Yes, you do. Because when you build "luxury" apartments at scale, you will put downward pressure on rents at all price points.

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• Housing is a ladder - it's all connected. New housing frees up older housing. Conversely, not building new housing results in a shortage of older housing. (Similarly, the shortage of new cars during Covid resulted in more people buying used cars, driving up prices.)