Suburban Apartments Show New Signs of Demand
The COVID-19 pandemic is impacting the commercial real estate market in myriad ways as many office buildings, retail businesses, restaurants and more remain closed. With cities quiet and many employees working from home for the foreseeable future, urban residents are questioning whether continuing to opt for smaller spaces at higher rents to achieve an urban lifestyle close to the office is worth it anymore.
Apartment living, which has long been considered a “recession-proof” CRE sector, might see some disruption as units in suburban locations become increasingly appealing for today’s renter, especially if employers also begin to open offices in the suburbs instead of downtown.
Jeff Burns, senior managing director at Walker & Dunlop in the San Francisco Bay Area, says that if working remotely becomes “a more permanent part of our work life, we might see dense, core urban properties with small units and high rents impacted most.”
“Oftentimes, you have roommates sharing these units to afford the rent, which could be problematic for a work-at-home situation,” he adds. “Even more newly built suburban properties that are denser, with smaller units, and with expansive shared high-end amenities might struggle as people look for larger live-work spaces.”
Less dense environments are also seeing interest from residents who feel cooped up during this strict quarantine phase.
“Apartment residents—especially in high-rise urban buildings—are getting cabin fever, and living in a 900-square-foot apartment is not helping” says Steve Hallsey, managing director at Atlanta-based Wood Partners, which operates about 20,000 apartment homes nationwide. During the past 18 months, Wood Partners has been shifting away from urban to more suburban locations.
“A lot of times residents can’t take care of their pets the way they want to because of social distancing requirements in dog parks and pet spas. They are complaining,” he notes. “When their leases are up, they will think about wanting to have their own yard.”
In a video from CoStar, publisher of LoopNet, John Affleck, CoStar's vice president of market analytics, reports that tenants seem to already be taking advantage of cheaper properties and cities. CoStar data suggests vacancies are rising in many downtown neighborhoods as proximity to offices and urban amenities become an afterthought.
“You don’t necessarily have to move to another metro to save a lot on rent. On average, asking rents in the suburbs are about $700 less than in the [central business district],” said Affleck. “In some markets, the gap is much larger: For example, in greater New York, Manhattan rents exceed $4,000 on average, whereas rents in New Jersey and Westchester County average less than $1,700.”
Apartment communities on the outskirts of some urban centers are seeing spikes in leasing applications. Portland, Oregon’s Templeton Apartments noticed that trend in April when demand for its Townhomes with a View community in Clackamas surged at unusual rates.
Clackamas is about 10 miles, or 20 minutes, southeast of Portland. Templeton’s Marketing and Brand Manager Sydney Webber says it’s a sign people might be retreating from downtown living.
“Interest in our urban core communities has been down the past two months,” Webber says. “We’re offering heavy concessions—around eight weeks of free rent. Our Clackamas property had been declining in occupancy, but now it’s full.”
Webber says two stable urban Class A properties comprised of mostly studios and one-bedrooms averaged a 4.8% year-over-year drop in occupancy from March to May. Over that same period, its Townhomes with a View community saw a 317% increase in weekly traffic while the two urban subject properties only saw a 74% increase in leads.
“Historically, renters have been willing to pay more per square foot to have a shorter commute to work and easy access to transit and nearby dining and shopping,” she says. “When you strip that away, these urban properties may seem less appealing. More and more businesses are announcing their employees will be working from home though the end of the year, so there isn’t a need to live close to the office. In fact, if there is some stability in their income, they may be looking to upgrade from a studio to an apartment that will accommodate a home office.”
Jeff Kayce, senior vice president and managing director at Greenbelt, Maryland.-based Bozzuto Development Co., says in recent decades, “we’ve gravitated away from the post-war auto-focused model of development, back toward a healthier societal-focused approach, which favors smarter growth and urbanism, whether in cities or well-planned suburbs. It would be great to see continued investment and smart growth of well-planned, close-in suburbs beyond which a more rural landscape is preserved, similar to many European areas that are linked by rail.”
Suburban Flight
The rate by which renters might choose to head to the suburbs will come down to what type of recovery we see this year and into next, says Hallsey.
“If it’s V-shaped, then there will be little downside. If it’s a long U-shape, then apartments will be a very competitive battle with single-family rentals, which have been booming in the last six months,” he says. “If we see a W-shaped recovery, the desire for urban living will wane, and that includes transit-oriented development. There will be a flight to the suburbs.”
So far, apartment operators are reporting high numbers of rent collections despite the staggering unemployment numbers. National Multifamily Housing Council Rent Payment Tracker found 90.8% of apartment households made a full or partial rent payment by May 20 in its survey of 11.4 million units of professionally managed apartment units across the country. This is only a 2.2-percentage point decrease in the share who paid rent through May 20, 2019, and compares to 89.2% that had paid by April 20. June rent payment performance will be telling.
“Suburban landlords may soon face serious challenges of their own, as the $600 per week federal unemployment benefit expires at the end of July, right around the same time that moratoriums on evictions end,” warned Affleck.
Transactions on Hold
For now, most residential owners are pausing on transactions. Discretionary sellers are happy to ride out the pandemic, and most owners that don’t have to sell right now won’t.
Wood Partners recently pulled 23 of its property listings temporarily.
“We’re in a holding pattern,” Hallsey says. “We’re certainly not desperate to sell because rent collections so far have been better than most everyone expected.”
Transactions so far are being dominated by opportunistic buyers, according to Thomas Walsh, Managing Director at Walker & Dunlop Investment Sales in Short Hills, New Jersey.
“During the past two weeks, ‘I’m a buyer’ inbound inquiries have doubled, if not tripled, that of ‘I’m a seller’ phone calls. Essentially, multifamily fundamentals remain extremely solid and agency financing is bolstering the ability to transact,” he says. “We aren’t witnessing a large number of distressed sellers, but as acquisition appetite continues to rise, so will owners seeking to either off-load certain assets or maintain liquidity as more opportunistic offerings are presented to the market.”
News reports suggest that big real estate investors are sitting on cash, waiting for property owners to capitulate. Sellers are currently willing to concede discounts of approximately 5%, while bidders are hoping for about a 20% discount from pre-COVID prices.
Kayce anticipates that there will be some potential challenges in extremely dense environments for which particularly high multifamily values are directly associated with immediately accessible urban amenities and proximity to expensive offices.
“With more acceptability of teleworking, less usage of urban amenities (in the short-term), and more interest in open areas, prices in close-in suburbs will likely appreciate even further at the expense of values in dense urban locations. Secondary cities may also benefit as urban environments that provide less intense density and costs of living.”
