by Brianna Crandall — March 9, 2016—Could the suburbs be back? After years of urban living domination, a growing number of renters are being wooed away from the core — attracted by suburban multifamily projects in transit-oriented, job-laden markets that offer a break from high downtown rental rates, according to global professional real estate services and investment management firm JLL (Jones Lang LaSalle).
Noticing the shift, investors are also taking a fresh look at suburban assets as a way to diversify their portfolios amid worry of near-term market softening, and multifamily property managers and facilities managers may want to take note of these trends to see how they will affect their facilities as well.
JLL’s Multifamily Suburban Investment – Winter Perspective examines these urban-to-suburban migration trends, identifying three primary drivers including affordability, jobs and transit, and ranking the U.S. markets best positioned in each category to benefit from these shifts.
“The recovery of our nation’s CBDs has been exciting to witness, but 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,” said Travis D’Amato, JLL managing director in Boston. “These fundamentals can build until the players in the game reach a tipping point and start looking for more price-appropriate housing.”
Affordability
According to JLL research, the U.S. multifamily investment market has enjoyed two consecutive record-setting years and the most robust development cycle in nearly three decades. Much of this demand is driven by Millennials, who at more than 83 million in strength represent a quarter of the total U.S. population. These renters have flocked to urban living, pushing rents up at a faster pace in 2015 than at any point since 2007. At year end, rent growth had reached a five-year high of 4.6 percent.
Rent growth has been particularly strong in coastal cities, where high-tech job growth serves as a magnet for young professionals but where rents and single-family housing costs also rank among the highest in the nation. This imbalance between demand and affordability has pushed the outlying areas of San Francisco, Silicon Valley, Oakland / East Bay and Seattle to the top of JLL’s list for suburban investor opportunity.
“These are mature economies with tremendous job opportunities for young workers,” said Stephen Jackson, senior vice president 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.”
Job market
Renters outside of the CBD are gravitating toward suburbs with dynamic job markets.
As renters commit to apartments outside of the CBD, they are gravitating toward those suburbs with dynamic job markets. According to JLL, today’s job-heavy, demographically strong suburban markets are heavily concentrated in the Sunbelt. Phoenix, Austin, Orlando, Dallas-Fort Worth and Tampa, for example, are leading the way in job growth, exceeding 3.5 percent in both Orlando and Phoenix.
They also enjoy a strong existing suburban office market, where average year-end absorption reached as high as 3.1 percent. The combination of job growth and office leasing momentum has these cities teed up to see strong multifamily growth in the years ahead.
“Florida offers a prime case for suburban multifamily upside potential,” said 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.”
Transit
With Millennials driving multifamily trends, it is not surprising that transit-oriented projects are in high demand, notes JLL. Cities like San Francisco, Boston, Chicago, Philadelphia and Seattle top JLL’s list for the strongest transit-oriented multifamily markets. Suburbs surrounding these Tier One cores are 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,” said 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.” However, D’Amato notes, these are still discerning renters that require high-end product: “Developers are building high-quality rental product in these locations at a quasi-suburban cost structure and achieving quasi-urban rents.”
Particularly in these areas, creative multifamily concepts that offer the best of suburban and urban living have a higher chance of attracting the attention of today’s massive Millennial renter pool, according to the report. In the eyes of investors, this creates a resiliency that can persist not only through near-term softening but also into the next decade as Millennials establish themselves in their professions and households.
Even as many downtown multifamily markets continue to grow, achieving new historic market highs, the suburbs are clearly gaining steam. This is evident in the pricing gap between urban and suburban product, which is tightening in 83.8 percent of all U.S. markets relative to the historic norm.
JLL’s full United States Multifamily Perspective, Suburban Investment – Winter 2016, is available to download upon brief registration.
