“Surban” may become an important word for real estate investors this year. It’s short for “close-in” suburbs next to major cities, and surban locations are where much of the 25- to-34-year-old cohort is looking to live. According to statistics from realtor.com, Situs RERC and others, America’s most expensive cities are often too pricey for these young residents that are saddled with historically high student debt. While the more affordable outer-ring suburbs might lack amenities and offer long commute times, surban areas usually offer the live/work/play town center environment that Millennials seek, including access to mass transit and the good schools they typically grew up with, as well as proximity to their parents and other family members at a better price point.
However, for a number of reasons, including sizable down payment requirements and need for flexibility, home ownership rates continue to decline in many markets as Millennials continue to rent.
As Millennials begin to set up households and start families, the main problem they encounter is a lack of multifamily product, and the right product at that. While some gateway cities are currently experiencing an oversupply of class-A multifamily properties that primarily target singles and dual-income households with no kids (“DINKS”), the availability of desirable multifamily housing in surban markets is at historic lows. Further, available inventory is generally not well aligned with the Millennial lifestyle.
Much of multifamily inventory in surban areas is obsolete, having been built 40, 50 even 60 years ago. Further, a swimming pool is not enough to meet the needs of today’s Millennial renter looking for, above all, value—amenities, functional space and a lifestyle which includes walkability and convenience. This dearth of product leaves the door wide open for real opportunities among investors and developers of multifamily product.
Suburban markets seeing the most demand from this age group include areas around Dallas, Boston, Seattle, San Francisco and Chicago; the outer boroughs of New York City; plus Midwestern locations near universities, such as Minneapolis, Columbus, Ohio and Madison, Wis. A safe neighborhood is a top priority; so is access to quality schools, followed by community amenities and convenience.
Entrepreneurs are looking for business opportunities too in suburban locations as suburban office markets begin to improve. Older corporate campuses are being redeveloped into lifestyle centers offering a mix of multifamily, retail and office space. Aging Millennials are all too happy to forgo a commute for a convenient drive or walk to work, as well as proximity to their children’s schools and recreation just outside the big city.
Preliminary survey results from Situs RERC reveal that southern U.S. currently offers the greatest return across the multifamily property type—and with a strong return comes the potential for strong investor demand. Surban markets experiencing job creation in growth sectors and with local governments that understand the need to effectively improve the suburban living experience to meet an increasing preference for multifamily living include, but are not limited to, Charlotte, N.C., Denver, Nashville and Austin, Texas.
No doubt many suburbs and surban areas with their obsolete housing stock and aging infrastructure are ripe for redevelopment planning to accommodate a new and growing market of Millennials longing for quality suburban housing to meet their lifestyle requirements. The coming years promise continuing opportunity for the multifamily investor.
Glenn Brill serves as a managing director in the real estate and infrastructure solutions practice at FTI Consulting, Inc. Contact him at email@example.com. The views expressed herein are not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates or its other professionals.