by Dan Rafter
By now it’s become a familiar tale: The centers of big cities are enjoying a boom in multifamily construction, sales and leases. That’s because a growing number of people want to live in busy downtowns, where they can walk to public transportation, restaurants and shops.
But where does that leave the suburbs? Are the multifamily developments located in suburban communities languishing as renters flock to big cities?
Hardly, say Adam Klingher, managing director, and Joe Markech, director, with the Chicago office of multifamily and healthcare lender Pillar.
“It’s true that downtown areas are strong. We are seeing a lot of financing requests for multifamily buildings in downtowns. There are a lot of new buildings coming out of the ground,” Markech said. “But there are new multifamily products in the suburban areas, too, just as there are in the downtown areas. Younger people often want to be closer to a downtown. But that doesn’t mean that people with families aren’t still seeking out suburban markets. Regardless of whether you are talking about Chicago, Indianapolis or Cincinnati, the suburban markets are strong, too, when it comes to multifamily.”
What are these suburban renters looking for when it comes to apartment communities? Many suburban complexes today boast swimming pools and clubhouses, of course. Markech said that some owners try to differentiate their complexes by offering such perks as free Internet connectivity or free cable TV.
But that isn’t always the case. Many suburban complexes come without frills. They simply offer a good location with quality units. For suburban renters, that’s often more than enough, said Klingher.
“We do a good bit of workforce and affordable housing in the suburbs,” Klingher said. “The tenants that are attracted to these developments are looking for safe, decent housing that has nice, modern appliances and fixtures. They’re looking for a good place to raise a family.”
In urban areas, apartment owners often boast of their developments’ walkability: Tenants in the center of downtowns want to be able to walk to restaurants, shops, theaters, bars and grocery stores.
Walkability doesn’t mean as much in suburban apartment communities. Markech said that in some suburbs – such as the Chicago suburb of Naperville, for example – it is possible to rent in an apartment complex near a thriving downtown center. But many other suburbs lack these city-center areas. For tenants in these communities, a short drive to the highway or to their offices in a bigger city might be the most important factor when it comes to location.
However, those suburban apartment complexes that do have a high walkability factor? They are in demand, Klingher said.
“There is a significant demand from an acquisition standpoint for suburban properties that have the attributes of urban properties,” Klingher said. “Those suburban properties that are walkable to grocery stores, a downtown center or public transportation options are some of the most popular multifamily properties for investors.”
Klingher cites a recent convention he attended. A researcher there told a crowd of commercial real estate professionals that the multifamily projects that attract the highest sales prices and generate the most demand from investors are suburban properties that have true urban characteristics.
A bang-up year
Klingher and Markech are predicting another strong year for multifamily transactions in 2016, both in the suburbs and in urban centers. This sector remains the strongest-performing commercial real estate type, and neither Klingher nor Markech expects any significant slowdown in acquisitions or construction activity this year.
“Last year was a bang-up year for us,” Markech said. “We had a great year. And it is starting off the same this year. Demand is very high. There is quite a bit of activity on the refinance side, and acquisition deals are actually up so far this year. There are more deals and more opportunities for acquisition financing so far this year.”
And while some key markets across the country might be nearing the point where the supply of new multifamily product is outweighing the demand for it, developers have plenty of options when it comes to cities and suburban areas that still need new apartment units.
Investors, too, can find plenty of purchasing options both in major Midwest markets such as Chicago and Minneapolis and in so-called tertiary markets such as Indianapolis, Cleveland and Cincinnati.
“A lot of people are branching out from the largest markets,” Markech said. “Clients are looking to do more business in the secondary and tertiary markets. Look at Indianapolis, for instance. There plenty of people looking to buy and sell multifamily properties who are actually in Indianapolis. But there is a growing number of people coming from outside that market who want to buy and sell multifamily. That is helping to keep the demand side strong in these tertiary markets.”
Klingher said that Pillar today is working on multifamily loans in such tertiary markets as Decatur and Springfield, Illinois; Kalamazoo, Michigan; and Fort Wayne, Indiana.
“There are a lot of long-term holders in those markets seeing values at a point they haven’t seen in the past,” Klingher said. “And you have new owners who are looking for yield. There are higher returns now in the secondary, tertiary markets.”