The high rents associated with multifamily in the urban core has fueled investor appetite for new development and acquisition deals in those central downtown areas. However, in the meantime, many suburban projects have quietly been putting up better returns, according to industry researchers.
“This broad trend [toward urban] reflects the changing investment appetite of investment capital,” said Adam Drucker, a managing director with RCLCO, at the 2017 NMHC Research Forum. “They came to this conclusion that urban development had more value and less risk. And we all happily participated. But I’m not so sure that’s true.”
But finding those prime suburban investment opportunities isn’t as simple as investors would like. Even defining urban versus suburban can be problematic. However, two real estate firms have developed new systems to help them identify prime suburban opportunities.
Matt Vance, director of research and analysis for CBRE and economist for CBRE Econometric Advisors, said just targeting CBDs wasn’t enough to guide the company’s investment decisions. In fact, when the company dug into rent growth by density, it found that while denser urban areas commanded a significant rent premium over less dense areas, in many cases, there was little distinction in terms of rent growth. Moreover, they noticed that many high-density, urban areas (Boston, for example) were also exhibiting a flattening of the rent growth curve while the growth rate was still good in lower density areas.
Vance said this led the company to start looking for ways to identify the less dense, or suburban, areas that also had some of the vibrancy of desirable urban environments that investors associate with strong performance metrics. Enter the Live-Work-Play (LWP) Index, a systematic way of identifying Census tracts that exhibit characteristics like CBDs despite their distance from them.
“This tool allows us to look at the performance of certain assets over time and identify where the next emerging hot spot is,” Vance explained.
RCLCO’s Drucker said he waded into the urban versus suburban fray while working on a single-family focused project with the Urban Land Institute’s Terwilliger Center for Housing. “We were trying to change the binary discussion of city versus suburbs,” he said.
“The vast majority of Americans live in places that are suburban,” Drucker said. “When we go back to 2000, the growth has been largely suburban. Even when we go back five years, the growth is pretty evenly split. ... Almost three-quarters of millennials already live in the suburbs.”
What Drucker and his team came up with was something called the RCLCO Suburb Atlas, an interactive visualization of the suburbs in the U.S. The atlas breaks the suburbs in the top 50 metro areas into five major suburban typologies based on a series of housing-related factors. Also interesting is that when looking at rent growth projections, the place types have moved largely in parallel, although Drucker noted that there is a time lag with lower so-called value suburbs.
However, when asked about what role transit played in the different frameworks, Drucker said that transportation was not one of the factors, as transit was largely a non-starter in suburban markets as most residents circulate with cars. Moreover, there was some debate about whether close proximity to transit truly correlated to any kind of real rent premium.
Vance, on the other hand, said transit would be something his company will look to layer in as they move down the path of more predictive analytics.
“But driverless cars are going to make transit less of factor,” he added.
Click here to access Vance and Drucker’s presentations.