Apartment Investors Turn
to Suburbs After Crowding Cities
By Nadja Brandt,
Oshrat Carmiel
11:01 PM CST
March 5, 2015
(Bloomberg)
-- Real estate investor Robert Hart pulled into the lot of a 400-unit apartment
community in a San Diego suburb last month, prepared to pay up for the recently
completed project on a quiet residential street. A competitor from a publicly
traded landlord was already there, he said.
“It was on the one hand reassuring to know that we were both
chasing the same opportunity,” said Hart, president and chief executive officer
of closely held TruAmerica Multifamily. “On the other hand, it reinforced my
opinion that large institutional real estate investors will be chasing yield
far beyond the urban core.”
After years of clamoring to buy the most centrally located
rental buildings in major urban centers, U.S. apartment investors are
rediscovering the suburbs. Transactions for multifamily properties outside
cities -- often sprawling, garden-style complexes appealing more to families
than urban-dwelling 20-somethings -- are on the rise as an increase in
construction slows rent gains in more central areas.
“The urban supply was just continuing to ramp up pretty
quickly,” said Sean Breslin, chief operating officer of Arlington,
Virginia-based AvalonBay Communities Inc., the second-largest publicly traded
landlord in the U.S. “On a risk-adjusted basis, the suburban markets look more
attractive.”
About 45 percent of AvalonBay’s under-construction developments
are in suburban locations, while the pipeline of projects the firm has not yet
started leans 75 percent in that direction, Breslin said in an interview.
Apartment owners including UDR Inc. and Essex Property Trust Inc. are also
predicting growth outside major business districts.
Blackstone Landlord
Blackstone Group LP, the largest private-equity investor in real
estate, is building its own apartment company focused mostly on suburban areas
where there hasn’t been much construction, betting on a shortage of housing
supply. The New York-based firm agreed in January to acquire 36 low-rise
multifamily properties across the U.S. for $1.7 billion, according to people
with knowledge of the transaction.
Nationwide, purchases of apartment buildings outside the urban
core climbed 8.2 percent last year to a value of $82.5 billion, according to
New York-based property-research firm Real Capital Analytics Inc. In Boston’s
metropolitan area, 95 percent of all apartment-building sales in 2014 occurred
outside the city center, compared with 66 percent the year before, the firm’s
data show. In Seattle, the share was 85 percent.
The enchantment with the suburbs is a turnaround from just a few
years ago, when buyers and developers sought safe investments in downtown
rental housing, banking on demand from 18-to-34-year-olds who would be seeking
to rent in urban cores once the job market recovered. Across all markets, the number
of renter-occupied residences grew by 2 million last year, according to a
January report from the U.S. Census Bureau.
“Millennials are largely attracted to city centers,” said
Douglas Herzbrun, global head of research at CBRE Global Investors. “Anywhere
where you have a cluster of the kind of businesses that are growing today --
creative and technology.”
Building Boom
Developers rushed to build multifamily buildings to capitalize
on the demand, spurring a surge in supply that’s now keeping a lid on rents.
More than 77,000 apartment units were added across the country in the past
three years, according to Axiometrics Inc., a rental-data company.
Rents in urban core markets climbed 3.5 percent in 2014 from a
year earlier. That compares with an increase of about 5 percent in suburban
areas, Dallas-based Axiometrics said. The company defines urban core as areas
in and near the central business district of each metropolitan market.
“It will be relatively more challenging for investors going
forward in these core markets,” said Ryan Severino, a senior economist at
property-research firm Reis Inc. “You look at the fact that rent growth in
suburbs and central business districts isn’t that different and you combine
that with that there isn’t as much development, then the suburbs are looking
pretty good.”
Space, Schools
While newly built urban complexes tend to have smaller units
with a focus on such amenities as decks, spas and common areas similar to hotel
lobbies, suburban apartments are often low-rise, surrounded by lawns and trees.
They cater to tenants who seek more space at lower rents, and quality school
systems for their children, according to Hart of Los Angeles-based TruAmerica.
For his company, the appeal of the property south of San Diego
was simple math, Hart said. Rents in the suburban area are expected to climb a
combined 12 percent this year and next, compared with a 5 percent increase
downtown, according to data provided by Reis. TruAmerica, which owns rental
properties in suburbs of Los Angeles, San Diego, Southern California’s Inland
Empire and Denver, plans to make an offer for the complex when bids are due
this month, Hart said.
New Supply
Nationally, Household growth and rental demand will be greater
in the urban core than in the suburbs over the next year, AvalonBay’s Breslin
said. Yet that demand will be overshadowed by the high volume of supply coming
to markets such as Boston, where rent growth in the city proper averaged 0.3
percent last year, making it among the weakest urban areas in the country,
according to Axiometrics. In January, average rents in the city fell 2.4
percent from a year earlier.
“Even though there’s more demand there, supply is sort of
swamping it at the moment,” Breslin said.
Later this year AvalonBay will break ground on a five-building
rental community in Quincy, Massachusetts, about 10 miles (16 kilometers)
outside of Boston. The firm is also constructing a 191-unit complex in the New
York City suburb of Great Neck, on Long Island. The $79 million project will
include a heated infinity pool and a landscaped courtyard off Manhasset Bay,
Matthew Whalen, a senior vice president, said in an e-mail.
Faring Better
For Highlands Ranch, Colorado-based UDR, older apartments in
suburban Seattle fared better in the fourth quarter than assets in the city
because they were “less exposed to new supply,” Chief Operating Officer Jerry
Davis said on a Feb. 3 conference call. The real estate investment trust also
expects Boston to have “supply pressure downtown,” with better performance in
the suburbs, he said.
Essex Property, the West Coast’s biggest publicly traded
apartment landlord, is betting on increased rental demand in the outskirts of
the San Francisco Bay area. The Palo Alto, California-based company in August
spent $150 million on the 366-unit Apex apartment building in Milpitas, an area
connected by a light-rail line to downtown San Jose, about 7 miles away.
“A lot of people have been getting priced out of better
locations, and as a result they are looking for good value at lower rents, and
we believe they are finding that in a lot of suburban locations,” Chief
Executive Officer Michael Schall said in an interview.
While TruAmerica is still interested in some downtown markets,
such as Salt Lake City, the firm plans as much as 80 percent of its
transactions this year to take place in suburban areas.
“Millennials who spend 40 or 50 percent of their income on rent
in the urban core will get fatigued after a while,” Hart said. “That’s when the
suburbs will start to look very attractive.”
