The American Dream is often depicted as purchasing a home in the suburbs, complete with a perfectly manicured lawn and a white picket fence. That dream, however, is no longer just for homeowners. While many cite the COVID-19 pandemic as the trigger for the recent renter-fueled “flight to the suburbs,” the trading of downtown apartments for more spacious, affordable options located farther away from city centers was merely accelerated by it, continuing a long-term trend that multifamily investors and developers have tracked for decades.
Today, the trend is taking an even stronger hold across the country, especially in areas such as the Southeast and Southwest, which offer tax-friendly environments, warm weather and steady job growth in both urban and suburban areas. Considering that suburban luxury apartment communities offer many of the same amenities, if not more, than their urban counterparts at discounts of 10 percent or greater, it comes as no surprise that renters are increasingly setting their sights on these markets, as evidenced by several years of unprecedented rent growth. This, coupled with lifestyle shifts including the rise of remote work, have made suburban living options all the more attractive to tenants — a trend that is not expected to let up anytime soon.
THE APPEAL
Despite the obvious appeal of suburban multifamily communities for renters, recent economic factors such as rising interest rates, increased insurance premiums, and slowed rent growth may have some multifamily developers and investors worried about their bottom lines. What they may not know is that choosing to develop in the suburbs oftentimes can act as a hedge against tumultuous market conditions.
Consider this: If the economy is performing well, area renters of class B apartments will typically look to upgrade to class A options; and, if the economy is performing poorly, renters in the city will look to nearby suburban communities that offer the same perks for lower rents. Whether the economy is stronger or weaker, there will always be steady demand for well-located, high-quality multifamily product in suburban markets.
In addition to being “recession resilient,” there are several reasons why multifamily developers and investors have turned their attention to the suburbs outside of major cities. For one, land is easier and cheaper to acquire in the suburbs than in urban areas, where developers often have to aggregate several parcels of land purchased from separate sellers over time. In the suburbs, developers typically purchase all of the land for a new project at one time from one seller, saving precious time and resources.
Another major upside for developers is the opportunity to generate returns more quickly. Rather than taking the form of high-rises, suburban multifamily communities are typically walk-ups or garden-style communities that consist of several buildings. Because of this structure, owners can begin leasing completed buildings while the others are still under construction, enabling them to produce income before a project is finished. In comparison with cities, where owners often must acquire a full certificate of occupancy before leasing a building, developing in the suburbs enables investors to build, lease and sell assets at a faster pace.
Building in the suburbs can also improve the resident experience. Suburban multifamily communities typically offer more green space, larger unit layouts, flexible floorplans, state-of-the-art gyms, pools, accessible parking, and can be more pet-friendly than their urban counterparts, increasing the desirability of these properties by giving residents a bigger bang for their buck.
While the benefits of suburban multifamily development are clear, it’s important that prospective investors analyze and understand local demographic trends in new development areas in order to ensure the success of future projects. Failing to account for factors such as job growth and job accessibility, incoming competitive supply, and median household income can threaten a project’s viability. By understanding these trends, investors will be armed with the necessary information to choose an ideal development location that allows for competitive yet realistic rental rates, resulting in maximized returns.
LOOKING AHEAD
Despite the recent uncertainty within the real estate market as the industry navigates inflation and slowed rent growth, demand for multifamily product in U.S. suburban communities has remained consistent due to strong underlying fundamentals and steady population and job growth in these areas. For renters, the suburbs will remain attractive for their discounted rents, abundance of space and access to large-scale amenities. For investors, suburban development offers enduring appeal due to its ability to provide greater returns in a shorter period of time, a characteristic that is especially critical in the face of ongoing market volatility.
Jay Remillard is managing director at CP Capital US.