Apartment Developers Pivot to the Suburbs

Apartment developers are taking notice of the movement of people from urban areas to the suburbs. 

Steve Hallsey, executive vice president of operations for Wood Residential Service, says the pandemic has changed how the company works with residents to understand what they want. 

“There have been so many residents in our high-rise buildings just wanting out at the end of their lease,” Hallsey says. “They did not like being cooped up in a high rise and having to wait for elevators because there could only be two people in there. There were a lot of inconveniences that took place in high-rise properties.”

While this migration from high-rises may be temporary, Hallsey says single-family rentals are “the big disruptor” for apartment operators. “I think they have just shot off the charts, and it has impacted [apartment] occupancies in some areas people have really fled from,” Hallsey says.

Eventually, this migration could affect the underwriting of urban deals. Hallsey, who works at Wood Partners, the No. 3 developer on the National Multifamily Housing Council’s Top 50, sees this trend. “Everyone is going to have some incremental increase [in vacancies], but I don’t think anyone has underwritten that yet,” Hallsey says. “It’s changing the way that we’re underwriting. And that’s why I think there is going to be an interesting pivot to more suburban assets.”

Village Green CEO Diane Batayeh is also seeing a migration to the suburbs but doesn’t think it’s a long-term loss. But right now, many of the company’s apartments outside of cities are benefitting from the trend.

“We’ve been tracking relevant metrics and have seen suburban rents are climbing higher. Occupancies and rent collections are better,” Batayeh says. “In our urban portfolio, we are generally seeing a decline in lease trade out rates and it is not unusual to see rent concessions needed to increase physical occupancy.”

But that decline isn’t across the board. Some urban unit styles perform better than others. “In urban areas, we see lower or declining rents on the larger unit styles,” Batayeh says. “There is generally a flattening of rents on the studios and one-bedrooms.”

Others see issues with smaller units. “One bedrooms and studios are suffering,” Hallsey says.

In suburban areas, Batayeh says there is greater demand for larger unit styles however all unit types are experiencing rent increases and higher physical occupancy as compared to the urban portfolio.

Batayeh says suburban multifamily is more in demand in particular markets like Chicago, Minneapolis, and New York.  “Obviously, I think that’s no surprise,” she says.

Batayeh finds that apartments on the West Coast are taking more significant hits. “Our Midwest locations are the most stable, but we see drastic differences between urban and suburban stability,” she says.

Even with softness, in some markets, there is and will continue to be demand, as well as a shortage of certain types of rental housing. “There remains significant demand for affordable housing with continuing supply shortages,” Batayeh says. “I think that’s going to continue to be the case, even more so going into the future unless there are significant changes in either the cost structure or governmental obstacles.”