Posted February 02, 2015 by RentJungle
Where are the most popular markets for building multi-family housing developments? You’ll find the answer in this article from The National Multifamily Housing Council.

At the beginning of the apartment recovery, all eyes were on the “sexy six” core markets. Fast forward, however, and the suburbs are demanding more attention.  Media coverage notwithstanding, reports of the death of suburban multifamily development were greatly exaggerated.  

“Even though the urban core’s share of new construction is way up this cycle, two-thirds of starts have been suburban,” said Greg Willett, vice president of MPF Research.

A panel on the topic at the recent NMHC Apartment Strategies Conference took on many of the misconceptions of suburban development.  Among them?

All suburbs are the same.  We need to stop grouping them all together. There are “good” suburbs — strong markets with more jobs, higher house values, higher household incomes and urban-ish, meaning not bedroom communities and not sprawl.

You have to be in the Central Business District (CBD) to keep your units filled. Actually, demand exists beyond the urban core. If you look at the “good” suburbs, you see properties maintaining full occupancy.

The real rent growth is in the urban core. Also not true. On average, pricing increases in “good” suburbs basically match the performance in urban core markets. If anything, higher-rent suburban markets tend to outperform.

Urban core renters are young, suburban renters are older. Because of the price point in urban properties, a lot of renters are older than you might expect, and the lower rents in the suburbs mean those renters are younger than you might expect.

There’s too much competition in the suburbs because it’s too easy to build there. It’s easier to get capital for urban properties while more obstacles to development are cropping up in the suburbs. NIMBYism is alive and well in the suburbs and the entitlement process has gotten much tougher in recent years.

You can’t get capital for suburban development. Given that most investors already have a flag in the ground on CBD locations and considering rising construction and land prices, the suburban development story is resonating more with investors on a risk-adjusted basis. According to Brian Natwick, president of multifamily for Crescent Communities, “capital wants to diversify in their investment portfolio and the suburbs are a healthy diversification.”

You’re going to lose all those suburban renters to homeownership.  The percentage of move outs to house purchases hasn’t changed, and, in fact, the higher the rents, the higher the percentage.

You have higher renewal conversion rates in downtown markets.  The share of renters renewing upon lease expiration in “good” suburbs is 200 basis points higher. “From a customer standpoint, it makes sense to go after both,” said Carter Siegel, a director with Wood Properties.  “People live in suburban locations for specific reasons — schools, access to nature, lifestyle — offerings that aren’t available in the urban core.”

Willett summed up the session by saying, “it’s not an either/or, it’s an 'and.' Suburbs are great and we haven’t talked about them enough in recent years.”

Siegel concurred with the diversification argument, noting that “urban product is demanded by our customers, so we’ll always be there.  But at this stage in the cycle, we are looking to make better investments and more money in the suburbs.”  
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