Today’s edition sponsored by: JPI, Authentic, TeleCloud, The Kirkland Company and Northspyre.
Rental Housing Appears Increasingly K-Shaped
Back in 2021-22, almost anything in multifamily or single-family rental housing looked good. That’s what a once-in-a-generation boom can do. But then the story changed dramatically as rates and supply pressures rose while rents and valuations fell.
So, has rental housing lost its luster? Probably not. Rather, it’s a sector in transition. Rental housing is no longer one-size-fits-all like in 2021-22. It’s more targeted, which means sector-wide macro research and allocation strategies will miss it.
Here’s a prime case in point: If you’re looking at sector-wide averages, you’d probably conclude rent affordability is a headwind to demand and to rent growth. You’d probably fret over slowed immigration, too, among other things. But averages can be misleading, as we’ll share in this article.
Segmentation matters, especially now. And here’s one major emerging segmentation story to watch: the flight to quality.
Demand fundamentals and capital trends align with what we might call the K-shaped economy. The upper half of the rental market appears positioned to outperform the lower half of the market through the next cycle.
(On related topic: Check out the latest episodes of The Rent Roll podcast, deep diving on rent affordability myth-busting with Witten Advisors’ Ryan Davis. Find us on YouTube, Spotify, Apple and Amazon.)
First: Let’s Define “Quality”
Before going further, definitions are important. By “upper half,” we refer to what the industry calls Class A and Class B rental housing. And I do mean true Bs, not Cs that owners and brokers generously round up to Bs. When I talk about the A/B market, I am generally referring to (round numbers) the top half of the rental supply.
These are, broadly speaking, higher-quality buildings in more desirable neighborhoods. Rent premiums come with that.
Counterintuitively, Affordability is BETTER in Higher-Rent Rentals
And even though rent levels are higher, that does not mean affordability is worse. In fact, we find affordability is actually better in this part of the market. Why? Because even though rents are higher, renter incomes tend to be much higher than the overall averages, too. This is why REITs (even with B assets) all report rent-to-income ratios around 20%, well below the affordability ceiling of 30%.
It’s also why Witten Advisors’ analysis of Census data (discussed length in Episode 99 of The Rent Roll podcast) finds that renter households making more than $50k annually spend only 21.5% of income on rent. And Harvard’s Joint Center for Housing Studies reported that renter households making more than $75k spend less than 20% on income on rent and utilities combined.
Source: Witten Advisors, Census
That’s the demographic that lives in the top half of the rental market, Class A/B market-rate apartments and SFR.
And get this … It’s ALSO WHERE ALL THE GROWTH IS. I share this point frequently, and it can surprise even the most sophisticated firms with big research budgets: The flight to quality plays out in the demand data. Just look.
Harvard found that “the number of renter households with higher incomes (after adjusting for inflation) rose by 1.7 million from 2021 to 2024,” which explains nearly all net new renter household formation over that time period. Since 2014, the U.S. added 4.1 million higher-income renters, and they now comprise 35% of the renter population, up 7.1 ppts since 2014. That is a huge shift getting less attention than it deserves.
Source: Harvard JCHS
It’s always better to find multiple sources saying the same thing, and encouragingly, that’s the case here. CoStar data shows that, in each of the past three years, 80-90% of all net apartment absorption has gone up-market to higher-quality buildings. (Note: A critic may argue that this phenomenon is only because most new construction fits that category, and therefore that’s what gets absorbed. And while there’s truth to that, someone still has to want those apartments AND qualify to lease there, and that’s happened at scale. And Census data backs it up, too.)
Therefore, we have two different and equally true realities that on the surface may appear contradictory:
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We have a severe shortage of low-income housing for low-income households.
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At the same time, we’ve seen ample demand for market-rate Class A and Class B rentals among renters who can easily afford them.
Here’s the big takeaway: Most new renter households can afford better-quality rentals in better-quality neighborhoods without pushing the limits on affordability. That has huge implications on investment strategies into multifamily and SFR going forward. Every rental housing investor should understand this.
It’s also a clear example of the K-shaped economy, as I referenced earlier. Headline narratives often portray renters at large as financially challenged, and that narrative distracts investors (and policymakers, for that matter) from an important nuanced reality: There are “haves” and “have nots,” and the growth is among the “haves” even as the needs are most dire among the “have nots.” (For example: Renter households making less than $30,000 annually spend more than 80% of income toward rent and utilities, which is exceptionally problematic – and that’s nearly one-third of all U.S. renters.)
But … Can the Flight to Quality Trend Continue?
You might read this and think: Well, that’s the past. But can it carry into the next cycle? Obviously, there are no certainties. But there’s a good argument that the flight to quality effect is just starting. Here’s why.
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One reason could be reduced immigration – an oft-cited headwind among rental housing bears. But, again, segmentation matters. Recent immigrants tend to favor lower-priced, smaller sub-institutional rental properties, according to analysis from John Burns Research & Consulting (and referenced in a podcast we did with JBREC demographics guru Chris Porter), meaning it’s likely disproportionately impactful to the lower half of the rental market … and far less of a factor in the higher-priced A/B market.
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Secondly, the elongating renter stage of life plays a role. The increasing number of older adults choosing to rent could favor Class A and B rentals simply because incomes (and preferences) tend to go up with age. As Americans are waiting longer to buy houses (a trend dating back to the late 1970s when Boomers were coming of age), we could see more and more 30+ year-old renters targeting higher-quality rentals … and with household incomes to get them there comfortably.
Source: John Burns Research and Consulting
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Furthermore, Realpage data shows Class A and Class B apartment rents recovering faster than Class C rents. That’s especially true in higher-supplied markets. If that seems surprising given the concentration of supply at the top end of the market, think about it. When renters have more options, they tend to favor the better quality properties in better locations, and they’re willing (and able) to pay for it, as CoStar and Harvard data show. Obviously rent cuts and concessions have helped, but it’s still happening (and with rent-to-income ratios for new lease signers now below 22%, providing cushion as rents recover). Meanwhile, lower-tier properties are often cutting rents even MORE to backfill units.
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Still in doubt? Well, consider one more factoid: Academic research shows a “filtering” effect at work, pushing demand UP market to higher-tier properties and thereby pushing rents DOWN in lower-tier properties. Research from the Pew Charitable Trusts found that “in areas that have recently added large amounts of housing, rents have fallen the most in lower-income neighborhoods with older buildings.” That’s the flight to quality phenomenon in action. The Minneapolis Fed published similar findings.
One additional thought: Class C weakness is generally much deeper in higher-supplied markets than in lower-supplied markets. In lower-supplied regions like the Midwest and Northeast (and parts of the West Coast), the structural undersupply of housing may continue to boost demand for the lower half of the rental market. In fact, Class C rents are generally increasing in regions with very limited supply. So, once again, segmentation does matter in building a thesis.
There’s a Flight to Quality in Capital, Too
Importantly, this flight to quality isn’t limited to renter demand. We see similar shifts in apartment capital increasingly targeting newer-vintage properties and higher-rent neighborhoods.
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Splitting submarkets across the U.S. into three categories – high rent, average rent and low rent (based on a submarket’s average monthly rent compared to its parent metro area), we find a clear shift under way. Indexing apartment sales in all three categories back to pre-COVID levels from 2019, we find a very interesting emerging split. Apartment sales in 2025 were 90% back in higher-rent areas, 83% in average-rent areas and just 67% in lower-rent areas. The gap is even wider for lower-rent areas in the Sun Belt and Mountain regions, where sales volumes last year came in at just 55% of 2019 levels.
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Apartment buyers also increasingly favor newer-vintage apartments. Research from Newmark found that apartments built in just the last 10 years represented nearly 40% of all apartment sales in 2025. That increased share came primarily at the expense of buildings 20-50 years old, which traditionally would be called value-add. Such deals dominated the transaction market in recent decades, but have seen a sharp decline in recent years.
All these trends point to a flight to quality among capital, just like we see among renters, which bodes well for liquidity and valuations moving forward.
— My Latest Posts on LinkedIn —
Here are some recent posts if you missed them:
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Renter households earning >$50k spend just 21.5% of income on rent.
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It’s easy to scream “the rent is too high,” but it’s not that simple.
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Class C rents fall in high-supply areas, rise in low-supply areas.
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Debt originations in multifamily are on track for the second-biggest year in history.
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Is pet rent a “junk fee”? The city of Seattle says so, but that view will likely backfire on renters — and their pets.
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Hello, Vivmark Residential! AvalonBay and Equity Residential completed their merger and began trading under the Vivmark name on August 18.
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New construction rents remain down substantially in some markets, but reaching new highs in others.
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Here are the top 20 MSAs for apartment rent growth right now.
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While consumer inflation has re-heated since the Iran conflict started, apartment and SFR operators report the opposite for OpEx.
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Here’s a wild chart showing the rapid decline in renter mobility.
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Apartment rent growth is trending upward again, and may have bottomed over this past winter.
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Here’s the apartment absorption leaderboard for the first half of 2026.
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There’s more apartment distress making the news (and surely even more to come), but it’s still not nearly as systemic as many people might think.
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There’s a big plot twist in the AvalonBay-Equity Residential merger.
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Apartment affordability continues to improve as rent-to-income ratios decline to pre-pandemic levels.
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JBREC analysis of Census data shows strong renter household formation, aligning with RealPage and CoStar apartment absorption data.
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The Wall Street Journal dove deep into NYC’s rent stabilized apartment program, and found a “surprising portion” of units go to high-income renters.
— Now Spinning on The Rent Roll Podcast —
For 2025, The Rent Roll with Jay Parsons podcast ranked in Spotify’s top 2% of podcasts for minutes played and in the top 1% for most shared shows. Additionally, The Rent Roll continues to frequently rank on Apple’s charts for investing-themed podcasts, and was recently ranked as the third-best podcast in all commercial real estate (and #1 in housing) by the readers of CRE Daily!
Thank you to everyone who’s made The Rent Roll part of your weekly routine! New episodes are released every Thursday morning.
Find us on YouTube, Spotify, Apple and Amazon. Recent episodes:
Episode 99: Rent Affordability: Myth vs. Reality with Witten Advisors’ Ryan Davis
Episode 98: Inside JPMorgan’s Big Bet on Rental Housing + Capital Markets Update with JPMorgan’s John Hofmann and Karen Purcell
Episode 97: Inside Pretium + 5 Takeaways from the SFR REITs’ Earnings Calls with Pretium’s Stephen Scherr
Episode 96: 5 Takeaways from Apartment REITs’ Earnings Calls with Camden’s Alex Jessett
Episode 95: Less Red Tape, More Supply with former U.S. FHA Commissioner Frank Cassidy
Episode 94: Renter Demographics Update with JBREC’s Chris Porter
Episode 93: Accidentally Institutional with 7 different mid-sized SFR/BTR operators
Episode 92: Mid-Year Multifamily Update with Greystar’s Quinn Eddins
