New from MPF Research: Suburbs Beat Metros in Multifamily Performance
In recent years, it’s been assumed that urban cores are better bets than suburbs for ROI in multifamily development. But new multifamily insights from MPF Research has debunked this “urban myth.” In fact, adjusted for risk, the “right” suburbs are generating the highest returns regardless of the hold periods.
Factors Driving Multifamily Development
To reach this conclusion, MPF Research used NCREIF (National Council of Real Estate Investment Fiduciaries) data in combination with YieldStar data on new apartment supply and market fundamentals. The researchers took an important and novel approach with this study: rather than dump all properties into two buckets, urban and suburban, they further classified them using rent levels along with job growth in the metro as a whole.
By doing so, they were able to show that “good suburbs” in metros with strong job growth have consistently outperformed “good CBDs” with strong job growth over the past 3, 5, 10 and 15 year time periods, on a risk-adjusted basis.
In other words, assets located in high-rent suburbs with superior job growth have produced returns somewhat above that of assets in “good” CBDs, with less risk. If you’ve been following our recap of MPF’s top apartment construction submarkets, you’ll see a clear anomaly here. Considering that typically only 10% of multifamily housing is in urban cores, they’re over-represented among the “top submarkets” these days. It’s evident that the perception of a bigger payback has driven an urban strategy that might be further questioned in the third quarter of 2017, when supply is predicted to peak and rent growth to soften as record deliveries hit these metro core markets.
MPF Research Reports on the Suburban Advantage
Even when all suburban areas and urban core areas are lumped together irrespective of job growth and rent performance, there appears to be a clear advantage in favor of the suburbs. Income returns for combined suburban groups increased by about 5.8% annually during the past five years, vs. only 5.1% in the urban core areas. Meanwhile, appreciation returns (asset appreciation) between the groups were virtually tied. Combined, the CBD groups generated total returns of 12.4% annually, while the suburban group came out ahead with 13.0%. These five-year numbers are particularly telling since they’ve come in since the Great Recession threw off the usual market dynamics.
Over the past 10 years, rent growth in the “good suburbs” (3.0%) outpaced that of the “good CBDs” (2.8%), and rent growth among the fast-growing CBDs saw the greatest volatility, a trend especially visible from 2009 to 2011 when trough-to-peak rents changed more than 14 percentage points.
MPF Research concludes that “the ‘good suburb’ group emerges from this research as a market inefficiency – a rare segment where investors are likely understating value and overstating risk.”
For more in-depth insights, check out Seeking Suburban Alpha: Apartment Investing in Select Suburbs Trumps Urban Strategies from MPF Research.