Apartment rents are growing downtown - but rents are growing even more quickly in strong suburban submarkets, according to the data from MPFResearch presented at the NMHC Research Forum, April 1-2 in Washington, DC.
“Not every Millennial wants to live in the urban core,” says Jay Parsons, director of analytics and forecasts for MPF Research.
As central business districts absorb a flood of new apartments, MPF defined a set of strong suburban submarkets that tend to have many of the most attractive features of downtown apartment. These submarkets are often close to jobs, shopping, and transportation. Compared to central business districts in quickly growing cities, these strong suburban markets also have comparable occupancy rates, lower turnover and - for now -- better rent growth.
“Central business districts are going to continue to underperform the strong suburbs in terms of revenue performance,” says Parsons.
The “good” suburbs
MPF picked the top 25 metropolitan areas for employment growth out of the 50 largest metro areas. Within those metro areas, MPF picked suburban submarkets where average monthly apartment rents were higher than the average for their metro areas as a whole, including more expensive urban areas.
These places turned out to be “urban-like suburban submarkets,” says Parsons. Apartment communities in these top suburbs may even look urban, with mid-rise or high-rise construction. “They tend to have proximity to jobs, retail, restaurants and they tend to be located along major corridors where retailers would be concentrated.” These top suburbs are not necessarily arranged rings around major cities. For example, strong suburban apartment markets cluster north of Dallas, Texas, and east of Seattle.
Parson’s “good suburbs” had 18 percent more jobs physically located within the submarket per household compared to other suburban submarkets, according to the latest, 2010 Census data. Incomes were 27 percent higher than the mean for the metro areas. They also have average home prices 29 percent higher than the average for the metro, so that rental apartments have less competition from relatively unaffordable for-sale housing.
Strong suburbs, strong performance
In these “good” suburbs, the apartments are just as likely to be occupied as they are in strong central business districts, both in good times and bad for the apartment business. The percentage of occupied apartments averaged about 95.5 percent in these top suburbs over the last four years, and averaged 94.6 percent over the last eight years - very comparable with the average occupancy rates in strong central business districts, according to MPF.
Occupancies in central business districts in metro areas with slow employment growth lagged both more quickly growing downtowns and good suburbs. Suburban submarkets in these slowly growing metros performed worst of all.
Apartments located in Parson’s good suburbs also have slightly higher resident retention rates than central business districts. Lease renewal rates are about 300 basis points higher in these suburbs. Urban renters, with smaller apartments, may be more willing to move because they have less furniture to pack. Suburban renters may be tied to local school districts and less willing to change their address.
Apartments located in the central business districts of quickly growing metros still earn the highest dollar rents, averaging just over $1.60 per square foot in early 2015, according to MPF. “That’s well above the good suburbs, though in the good suburbs you can still see a solid premium relative to the U.S. average,” says Parsons.
Rents grew more quickly in strong suburbs than in strong central business districts in the beginning of 2015. Rents grew an average rate of about five percent a year, according to the latest information collected by the properties management systems of MPF Realpage. That’s higher than both the national average of four percent and the average rents growth in strong central business districts, which has slipped below the national average as new apartments open in downtowns across the country.
Downtowns challenged by oversupply
Rent growth in central business districts is falling behind strong suburbs as a wave of new apartments open. Developers have already built more apartments in central business districts in the first half of this decade than any other decade in the U.S. going back to the 1940s. In contrast, strong suburbs can present steep challenges to new development, including “Not-In-My-Backyard” opposition to apartment development from locals.
Strong suburbs also have a fair shot at attracting young renters. It’s still true that a larger share of Millennials want to live in urban locations compared to prior generations - however, those young people who want to move to the big city are still a minority, even within their own generation. Almost 50 percent of Millennials said they would prefer a suburban location for their next home... only about 38 percent preferred an urban location, according to a recent study by the Demand Institute.