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, Va.-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 Highlands Ranch-based UDR Inc. and Essex Property Trust Inc. also are predicting growth outside major business districts.
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 Census Bureau.
“Millennials are largely attracted to city centers,” said Douglas Herzbrun, global head of research at CBRE Global Investors.
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 suburban Denver, plans to make an offer for the complex when bids are due this month, Hart said.
For 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.
