Investment in income-producing commercial real estate carries with it the same common thread of any investment: having an opinion on the future. Whether investing in IBM stock or Apple stock, Ford or Tesla, investors — by the very nature of investment — must form a yet-to-be proven opinion on future asset performance.
In the mid-1980s to early 1990s, investors in the Seattle/Puget Sound region, mostly in the form of developers, opined that suburban apartment development would meet demand and therefore produce an attractive yield. In our current apartment development cycle, investors are predominantly clustered in core locations, guided by risk-averse capital, demographic tides and perceived preferential shifts — all based on the opinion that urban development will produce the most attractive risk-adjusted returns.
As the current real estate cycle progresses, investors are clamoring to arrive at the most accurate opinion on future performance, asking “What locations will produce the greatest returns?” Early in this cycle, pundits roundly agreed these were urban. By 2013 and into 2014, a shift occurred, and yield-chasing prognosticators were shouting suburban. As of late 2014 and early 2015, market analysts and investors are predicting both! What is an investor to do?
Investment in “urban-suburban” styled apartments offer an elegant and hedgeable investment strategy — and possibly one with the most long-term risk-adjusted returns.
What is urban-suburban?
Urban-suburban is a descriptor for an urban-styled development – one with urban-like attributes — located in a more traditionally suburban location. But first, what are urban-like attributes? A short and illustrative list of characteristics may be:
- Transit-oriented or adjacent
- Having a “there-there”
- Near to lifestyle amenities
- Availability of retail experiences
- Modern aesthetics and amenities
Second, where are these locations? A fundamental requirement are locations where the current stock of housing — and other real estate assets — are suburban in configuration. In the Puget Sound region where I live, I identify nine such settings, as depicted on the following map.
Interestingly, of these nine locations, many have urban “roots,” and over half are adjacent or proximate to installed employment bases – a predominant feature of urban locations.
But I thought urban was all the rage?
Urban apartments have performed fantastically in recent years and captured the hearts, minds and dollars of the highly sought-after Millennial demographic, and I predict this trend to continue, for the most party. Yet, will such investments outperform the market over time and overcome urban volatility in the form of shifting growth and demographic patterns, congestion, crime, political and social change/pressures?
From an investment perspective, urban-suburban locations carry with them significant advantages over pure urban locations while still preserving urban aspects we urbanites crave. A short list illustrates fundamentals supporting a bent towards urban-suburban:
- Appeal to a demographic wider than pure urbanites
- More suitable to families
- Greater access to parks and open spaces
- More options for schools
- More affordable price point
- Affordable for-sale housing options proximate to for-rent housing (which nurtures community)
- More space!
The combination of urban attributes with lifestyle and family-oriented options previously reserved for suburbanites presents a compelling case for the appeal of urban-suburban housing options — especially over real estate cycles and demographic life cycles.
Where should I put my investment dollars?
From a strategic perspective — and even more so a temporal perspective — shifting investment strategies to time with market shifts is a perilous endeavor. Commercial real estate investments (outside those of the securitized variety) are illiquid investments by their very nature. Trading properties to suit current trends and opinions as to rental rate growth is not impossible yet is highly challenging and complex.
We are at the beginning stages of producing a stock of urban-suburban apartments. There are good investments to be found in all markets — urban and suburban alike. Yet the fundamentals of an urban-suburban apartment investment are compelling and lasting — and certainly worthy of forming an opinion.