Renters Eye Suburbs; Investors Follow Them

Investors are looking at Florida’s suburban corridors “in a new light,” says Vaghefi.

CHICAGO— Barry Sternlicht , whose $5.4-billion deal to buy a largely suburban multifamily portfolio from Equity Residential was greeted with some skepticism when it was first announced this past October, may end up having the last laugh. JLL reports that an increasing number of renters are being lured to the suburbs, thanks to new construction that offers relief from the high rents of core urban high-rises. Investors are taking another look at suburban properties as a way to diversify their portfolios, if not quite on the same scale as Sternlicht’s Starwood Capital Group . Take Florida as an example. The Sunshine State offers “a prime case for suburban multifamily upside potential,” says Jubeen Vaghefi , international director for JLL in Miami. “Jobs are back and rents are rising quickly in tier one markets like Miami and Fort Lauderdale. “As this happens, investors and developers are showing renewed interest in our suburban migration corridors,” Vaghefi adds. “They are looking at these areas in a new light, considering where they might place capital now to reap the greatest rewards in the long term.” Vaghefi’s colleague in Boston, managing director Travis D’Amato , notes that although the recovery of US CBDs has been “exciting” to witness, “it has also created a game-changing rise in multifamily demand, values and rents—a trend that is starting to price owners and renters out of the urban core. These fundamentals can build until the players in the game reach a tipping point and start looking for more price appropriate housing.” Millennials in their unprecedented numbers have been largely responsible for the surge in demand that has driven multifamily investment and development over the past two years. Given their expressed preference for renting in walkable urban environments, it’s a little ironic that JLL sees the millennial magnets of San Francisco, Silicon Valley, Oakland/East Bay and Seattle as the best bets for suburban investor opportunity. The reason is that while these cities represent high-tech job hubs, simultaneously they offer some of the most costly rents and single-family housing in the US. “These are mature economies with tremendous job opportunities for young workers,” says Stephen Jackson , SVP for JLL in San Francisco. “Millennials want to live in these core markets but reality is driving them to communities outside of the city center, where rents are more affordable. As this happens, investors have a prime opportunity to buy in well-positioned, nearby suburban markets and benefit from what will likely be a long runway of demand.” Transit-oriented development is another driver, and JLL sees San Francisco, Boston, Chicago, Philadelphia and Seattle as the strongest transit-oriented multifamily markets. These cities’ suburbs rank among the nation’s leading and emerging mass transit markets, and are expected to capture new transit-oriented development as economic expansion continues. “In a cycle that is dominated by a very active renter demographic, good intra-market connectivity plays a critical role,” says D’Amato. “Amenities like trains and light rail that connect a greater metro area allow residents to conveniently work and play downtown, just as they would if they lived there.” Yet D’Amato points out that these would-be suburbanities are still discerning renters and require high-end product. Accordingly, he says, “Developers are building high-quality rental product in these locations at a quasi-suburban cost structure and achieving quasi-urban rents.”