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Real Estate

When is a B better than an A?

Brookston Flats in Charlotte, North Carolina

When it comes to investments in housing, the highest quality asset doesn’t necessarily correlate to the highest return on investment. Class B apartments are a step below Class A in terms of amenities, location, building quality and renter incomes. But the Class B apartment subsector has outperformed Class A for the last decade. With its undersupply and resilient renter demand, we believe this subsector is poised for continued outperformance.

Class B rent remains in line with tenant income

The incomes of Class B apartment renters grew a cumulative 24% between March 2020 and December 2022, mainly due to the healthy job market. The increase was relatively in line with the 25% cumulative increase in Class B apartment rents over the same time period, keeping this cohort’s rent-to-income ratio unchanged despite record rent growth.

Meanwhile, due to above-average home price appreciation and rising interest rates, the mortgage payment for a midlevel home purchase increased 98% over the same time period, diverging from rent and income growth in the fall of 2021.

Potential buyers are now facing the most significantly skewed rent-vs-buy calculation in years, in favor of renting. This dynamic should further support demand for rental housing over the next few years, particularly for Class B apartments, which are more likely to be rented by necessity rather than choice.

Indexed growth of Class B tenant incomes versus housing costs

Class B performance outshines Class A

New supply has largely been concentrated in the Class A market segment, an issue that is somewhat structural due to limited land availability and elevated construction costs. In this environment, constructing units that fetch higher rents can sometimes be the only way a developer can turn a profit. In past cycles, apartments have generally been a good inflation hedge, as the short-term nature of apartment leases provides the opportunity to pass along increased expenses in the form of rent increases. However, this is only the case where market conditions are favorable to rent growth. Across many of the largest U.S. apartment markets in 2022, the Class B segment largely maintained higher occupancies than the Class A segment.

The Class B segment has outperformed Class A on a total return basis throughout the last decade, according to our analysis of NCREIF data. Although the data cannot be queried by Class A versus Class B, using +/- 10 years of age provides a reasonable proxy for quality. Notably, we also found similar outperformance of garden-style apartments (often Class B) over high rise apartments (often class A).

Class A versus Class B occupancy, 2022 average
Annualized apartment total returns, by property age

Class B investment opportunities are compelling

While markets show some moderation of demand and rent growth, both are elevated relative to history and are simply down from record peaks. Elevated construction within the sector is likely to weigh a bit on fundamentals in the short term, although our base case remains for above-average rent growth over the next few years. We believe that rent growth and occupancy rates within the Class B subsector will be particularly resilient. Given the subsector’s healthy fundamentals and resilient demand, we believe there are compelling investment opportunities in Class B apartments.


In this issue
Real Estate Tax benefits and implications for REIT investors
Real Estate Investment Trusts (REITs) have become an interesting option for income investors due to their income payouts and capital appreciation potential.
Real Estate Going global may benefit U.S. dollar investors
Global economic divergence creates opportunities for investors.
Real Estate Isn’t it all just real estate?
Explore frequently asked questions about the role of public versus private real estate.


The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on Please note, it is not possible to invest directly in an index.

Important information on risk

All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. Real estate investments are subject to various risks, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems and liability. Please consider all risks carefully prior to investing in any particular strategy. A portfolio’s concentration in the real estate sector makes it subject to greater risk and volatility than other portfolios that are more diversified and its value may be substantially affected by economic events in the real estate industry. International investing involves risks, including risks related to foreign currency, limited liquidity particularly where the underlying asset comprises real estate, less government regulation in some jurisdictions, and the possibility of substantial volatility due to adverse political, economic or other developments.

This document provides general tax information. Nuveen is not a tax advisor. Clients should consult their professional advisors before making any tax or investment decisions. This information should not replace a client’s consultation with a professional advisor regarding their tax situation. Neither Nuveen nor any of its affiliates or their employees provide legal or tax advice. Tax rates and IRS regulations are subject to change at any time, which could materially affect the information provided herein.

Nuveen provides investment advisory services through its investment specialists.

This information does not constitute investment research as defined under MiFID.

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