Even before COVID-19, apartments in some inner cities were exposed to the pressure of the new supply. According to CoStar Group, 80 percent of the 611,000 units under construction are at the high end of the market.
"I think we've been talking about this for a while on the multi-family side," says Juan Arias, senior consultant at CoStar Portfolio Strategy. “In the event of a recession, there would be significant excess supply, especially in luxury urban apartment buildings. They built a lot of apartments. We saw sufficient demand before the pandemic, but obviously all bets are closed at this point. "
The pandemic made matters worse. According to CoStar, apartments in the city center seem to be bearing the brunt of the pandemic – across all grade levels.
Rental growth for four- and five-star apartments (five-star apartments are of the highest quality, while one-star apartments are the lowest on the CoStar scale) has underperformed.
"There's a double punch for four or five stars," says Joseph Biasi, a consultant for CoStar Advisory Services. “We have this excess supply that we have been expecting for some time. Additionally, COVID has forced people to rethink where to work from home (bring acceptance) and cities that are more affected, especially New York City. "
According to Biasi, four- and five-star apartments are more vulnerable when people move to the suburbs. CoStar data shows that rental growth for these apartments fell nearly 1.5% in April. It rose again in early July, but fell to almost 0.5% at the end of July.
While rents in these high-end homes have fallen, demand for four- and five-star homes rose nearly 1% in the second quarter.
“Four and five star occupancy rates have fallen the least in the dense primary urban areas compared to any other star rating,” says Biasi. "That shows you that it's not about the existing four- and five-star apartments. Whatever is in the pipeline that is being delivered now or what has been delivered in the past few months just isn't renting out (well). We haven't seen much lease for this new product. "
According to CoStar, demand in “first-class” urban areas actually fell slightly in the second quarter.
"We're seeing a wave of supply of multi-family units and the demand for units specifically designed to deliver is slowing down significantly," says Arias. "Here we see the concern."
However, not all urban apartments are luxurious. In the second quarter, CoStar saw demand for one- and two-star housing in prime urban areas decrease by almost 1%. It also fell slightly for one and two-star city apartments. With lower-income households struggling with layoffs and unemployment benefits, it is not surprising that the occupancy of these cheaper apartments is falling.