Insight 11: Don’t Bank on a Flight to Quality

By Jay Parsons, Greg Willett and David Polewchak Over the past few decades, the “flight to quality” was a go-to strategy for many apartment investors. The theory is simple: When tough times hit, renters will flock to high-quality assets in high-quality locations. Investors typically define “high quality” as Class A assets in more dense, urban locations. The strategy generally worked in past downturns to varying degrees. But in 2020-2021? Not so much. The world has changed – and not just due to COVID-19 peeling away some appeal for urban living. Developers over the last cycle flooded the market with very high-end, very expensive new apartments generally concentrated in urban submarkets. Today’s Class A properties are materially more expensive – widening the gap between Class A and Class B. The new math makes it significantly challenging to lure Class B, and instead creates an environment where high-quality assets are cannibalizing one another for renters. How can operators and investors adjust to the new realities of 2021 – and the new math that alters the long-time investment premise? Listen or watch to learn more on this topic. The New Math In the mid-2000s leading up to the Great Financial Crisis, a typical Class A apartment nationally was about $300 more expensive per month than a Class B unit. That fairly manageable gap allowed property managers to lure some Class B renters up to higher-end properties with rent cuts and concessions. But that price gap surged over the following decade. By the time COVID-19 hit in 1Q 2020, an average Class A apartment cost $500 more per month than a Class B unit. That gap is almost impossible to overcome with any reasonable rent cut or discount. But that hasn’t stopped property managers from trying. The gap shrunk to $400 by year-end 2020, but with little benefit to occupancy – suggesting few move-ups. Fundamentals remain much stronger in Class B versus Class A....