Class B Apartments are Bearing the Brunt of New Supply Surge

Good morning,

Class B apartments are bearing the brunt of new supply surge; Rite Aid files for bankruptcy amid years of losses; and housing market freezes as mortgage rates hit two decade high. Let’s delve into today’s topics.

📈 Market Update

🏘️ Class B Apartments are Bearing the Brunt of New Supply Surge

The U.S. apartment market is seeing the effects of the massive surge in new construction, with Class B properties feeling the biggest impact. In high-supply submarkets, Class B rents have fallen significantly more than Class A, largely due to new units narrowing the rent gap and making move-ups more attractive. Pent-up demand among higher-income renters for newer product has also played a role. While Class B was thought to be fairly insulated from new supply at first, “filtering” and “flight to quality” are happening faster than anticipated. This should continue through 2024's peak, but there are some factors that may change, including higher pro formas for 2024 and the next step being a pull up of Class C renters into newly vacated Class Bs.

🔍️ The Outlook:
As the wave of new supply recedes, concession hoppers may be less likely to move. Additionally, pro forma rents on 2024 product should be higher than 2023, making move-ups more expensive. And as more Class B units are vacated, Class C renters moving up could provide support. Overall, while the next two years look challenging, there are signs conditions could stabilize for Class B after the peak of deliveries passes.

💊 Rite Aid Files for Bankruptcy Amid Years of Losses

After years of declining sales, failed mergers, and mounting losses, Rite Aid has filed for bankruptcy, buckling under the weight of debt and lawsuits related to the opioid crisis. The drugstore chain has closed over 200 stores in the past two years and will shutter more as part of restructuring, putting many retail jobs at risk. Rite Aid has struggled to compete with larger rivals CVS and Walgreens and has been plagued by debt since a massive but troubled acquisition in 2006. The company now faces hundreds of opioid-related lawsuits that pushed it into bankruptcy.

🏠️ Housing Market Freezes as Mortgage Rates Hit Two Decade High

With mortgage rates climbing to their highest levels since 2000, existing home sales in 2023 are on track to hit lows not seen since the 2008 financial crisis. Sales are slowing dramatically as high rates, still-elevated home prices, and limited inventory deter buyers. This slowdown will likely impact the broader economy, curbing spending on housing-related goods and services. Though different than the early 2000s crash, persistently high rates and low affordability signal an extended slump ahead.

↪️ The Takeaway:
The housing market is facing an extended downturn as high rates persist, inventory remains low, and affordability is at 1985 lows. Home builders are already pulling back, prices are being cut, and sales are declining rapidly. This points to a broader economic impact, potentially lowering GDP growth and keeping rents elevated. The market likely won't recover until rates moderate and more supply comes online, but that relief could be years away. The housing sector looks poised for a deep freeze rather than a quick cooldown.

✍️ Further Reading

• Most of Retail Shrink May Occur in the Supply Chain (GS)

• How an IRS Contractor Leaked Tax Data on Donald Trump, Jeff Bezos and Elon Musk (BBG)

• 2023 Q3 Saw Problems for Retail, Especially With Low Construction (GS)

• What Will It Take for Investors to Jump Back Into Office? (GS)

• Zoning Wars: City’s Developers, Future at Mercy of Politics (RD)

• Florida’s Battered Orange Growers Are Cashing In on a Housing Boom (BBG)

• ‘Circuit Breaker’ Tripped on Multifamily Construction Financing (CS)

📊 Chart of The Day