Apartment Performance in Good Times and Bad

This study estimates and interprets the effects of macroeconomic and local housing market conditions on rents and occupancies in different segments of the multifamily rental housing market. The research uses longitudinal data from a nationally representative sample of apartments drawn from the American Housing Survey to determine whether apartments of different quality grades are differentially affected by income and job growth at the national level as well as in the local metropolitan market. Results indicate that most of the variation in rent change and occupancy status is idiosyncratic and apartment-specific. In addition, the evidence suggests that top-end "Class A" properties outperform others where and when overall housing demand is growing briskly, but that these luxury properties underperform the broader market when the economy is slow. The results are consistent with a theory that demand is more procyclical for topend apartments than for the overall market, and that this demand differential boosts Class A performance in expansions, especially in the early stages prior to the resulting pickup in luxury construction. In economic downturns, the theory holds that frictions, property image, and resident relations prevent luxury properties from adjusting rents downward quickly and completely to maintain high occupancy by drawing residents from the middle segment of the market. The findings highlight the importance of effective property management, particularly for those properties at the top end of the apartment market, when changing market conditions call for adjustments in asking rents and marketing strategies. This research was supported in part by a grant from the Real Estate Research Institute.