\n<\/p>\n
In this episode of The Inside Look, Senior Commercial Real Estate Economist Xander Snyder explains how a surge of new luxury apartment deliveries can ripple through the market and impact every tier of multifamily housing –\u00a0a process known as filtering.<\/span><\/span><\/p>\n Watch below and subscribe to the CRE Insider blog for additional First American Title NCS insights.<\/span><\/span><\/p>\n \u00a0<\/p>\n Transcript:<\/span> New Apartment Supply Heavily Concentrated in Class A Properties<\/span><\/p>\n We\u2019re in the midst of a wave of new apartment deliveries, and a lot of new apartments are set to be delivered to market this year. Most of them, though, are Class A units.<\/span><\/p>\n At first glance, this might suggest that this new Class A supply won\u2019t impact rents for lower-quality units. After all, if someone can\u2019t afford Class A rent, then new Class A supply coming to market doesn\u2019t really help them, right?<\/span><\/p>\n Not necessarily! Let\u2019s take a look at why.<\/span><\/p>\n The A, B and C\u2019s of Apartment Quality<\/span><\/p>\n Class A properties have more amenities than new Class B properties, which is sometimes referred to as \u201cworkforce housing\u201d. Class C properties, meanwhile, are typically older buildings with more affordable rents.<\/span><\/p>\n Over time, buildings that began as Class A can become Class B as they get older, and newer, nicer units become available to replace them.<\/span><\/p>\n The same thing happens to Class B buildings over time \u2013 they can turn into Class C buildings either as newer Class B buildings are built or as Class A buildings age into Class B stock.<\/span><\/span><\/p>\n Filtering <\/span><\/p>\n New Class A apartments typically attract renters at the higher end of the existing Class A market. If you\u2019re already in a nice apartment, then you really need something new and amenity-rich to pull you out of it.<\/span><\/p>\n As people who can afford to move into the nicest, newest apartments, some of the existing stock of not quite as nice Class A stock opens up.<\/span><\/p>\n Who fills that now vacant, nice but not quite as nice, Class A stock? Either other Class A renters looking for a new apartment, or Class B renters looking to upgrade.<\/span><\/p>\n New supply can therefore pull demand from lower quality stock, increasing availability at all levels. This process, where new supply \u201cfilters\u201d through different layers of quality, is called \u201cfiltering\u201d.<\/span><\/p>\n Why Filtering Matters<\/span><\/p>\n Why does filtering as a concept matter? Well, imagine you\u2019re an investor that wants to purchase a Class B apartment property in a city with a lot of new deliveries of Class A units scheduled in the first 18 months of your investment.<\/span><\/span><\/p>\n If you think that the new Class A supply won\u2019t impact your Class B rents, since new Class A units will only be attracting other Class A renters, then you might conclude that your Class B rents are insulated from this new supply and won\u2019t be impacted.<\/span><\/p>\n But if you take filtering into account, then you might recognize that Class B rent growth could soften or decline due to a large new supply of Class A units.<\/span><\/span><\/p>\n Events<\/span><\/p>\n I\u2019ll in Indianapolis in mid-September to give a talk about the state of the CRE economy at an event being held by First American\u2019s National Commercial Service\u2019s.<\/span><\/span><\/p>\n I\u2019ll also be in Detroit in mid-October, at another First American Event. If you\u2019re interested in attending either, please reach out to your local First American Representative.<\/span><\/p>\n<\/div>\n
<\/span><\/span><\/span><\/span><\/p>\n