Investors are seeing bigger returns from apartments in the suburbs than they have in the past. Rents for suburban apartments grew at the same pace over the last five years as those in urban areas, according to new data from MPF Research.
“Returns from property appreciation over the past five years were virtually tied between suburbs and downtown areas,” according to MPF’s analysis over the top 50 U.S. apartment markets. Usually, apartment properties in urban downtowns tend to provide the highest returns from appreciation. However, over the last five years, that has changed. Suburban apartments have caught up as rents quickly rise, the National Real Estate Investor reports.
For both, the return on investment from price appreciation averaged 7.3 percent over the last five years, according to NCREIF data. In the suburbs, however – where rents and jobs are growing — the average return was near 8 percent.
“Apartment buildings downtown now often have to compete with the many newly opened high-rises,” reports the National Real Estate Investor. Rents rose less than 2 percent for apartments in downtown districts in the 12 months that ended in the second quarter. Meanwhile, in prime suburban and suburban markets, rents were double that, growing by 4 percent over that period.
“Urban areas have enormous volatility in rent movement – and got hit the hardest in the last recession,” Jay Parson, vice president for MPF, told the National Real Estate Investor. “Top tier suburbs got hit less in the recession, and perform just as well, if not better, in good times.”
Investors may be rethinking their strategies. “There is a disconnect between where investors see the most value – urban areas – and where investors are actually generating the most income – top-tier suburbs,” Parsons says. “It will be interesting to see how long that dichotomy can persist. Are investors chronically undervaluing top-tier suburbs?”
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