I grew up in a small town, a rural place, and like a lot of country kids, I couldn’t wait to leave.
I imagined that living in New York City would be like something out of a TV show such as Seinfield or Friends—quirky, fun, exciting.
But when I graduated and moved to the Big Apple, well, the streets weren’t paved with gold—they were littered with homeless people. And that really got to me as a naïve 21-year-old country boy.
But what was even more appalling was the indifference to it. I’d watch in horror as commuters stepped over a sleeping homeless person on their way to work. My heart would break daily.
I quickly found that I just wasn’t made for city living. And I was always ashamed of that—of being a suburban kid, of preferring trees and backyards to streetlights and subways.
I felt uncool. Still do.
So why this amble down memory lane? Because I’m watching more and more apartments being built in city centers, while out here in the ‘burbs, we’re starving for them.
The new construction pipeline isn’t just city-centric, it’s also extremely top-heavy—concentrated on Class A assets—and that’s by design. The cost of land, labor, and materials makes it virtually impossible for developers to build a B asset in many markets, according to Jimmy Ringel, COO of Memphis-based Makowsky Ringel Greenberg, LLC.
Yet, whenever you go to a multifamily industry conference, all you ever hear about are A assets and the coasts. It’s reminiscent of that famous New Yorker cover, “The View of the World From 9th Avenue,” says Bob Nicolls, owner of Monarch Investment and Management Group.
“It’s like the flyover states don’t even exist,” he says.
Much like Weidner—a top owner that eschews publicity—Monarch often flies under the radar because it concentrates on “flyover” markets and B assets. But slowly, and surely, the coastal giants and institutional investors are—like most millennials—moving to the ‘burbs as well.
The Mouse That Roared
Consider Starwood Property Trust, arguably now the largest—and savviest—market-rate owner in our industry.
In its most recent conference call, Starwood chairman and CEO Barry Sternlicht spoke enthusiastically about the recent acquisition of a portfolio of low-income housing tax credit properties: “ … stable, very affordable housing, great stuff in terms of quality; we really wanted that deal because it gives us a double-digit growing yield, we think, for the foreseeable future … .” he said.
Now, let’s look at some of Starwood’s recent market-rate deals—particularly the $5.4 billion purchase of a quarter of Equity Residential’s portfolio, and the $1.9 billion purchase of Landmark Apartment Trust, both of which closed in January. Those two acquisitions alone brought nearly 47,000 units to Starwood’s portfolio.
But check this out: The overwhelming majority of those units aren’t in cities.
“Nearly everything we bought has been in the suburbs; if you look at the market-rate units we own, 95% of them are in suburban markets,” says Chris Graham, senior managing director with Starwood Capital Group. “There’s this myth about millennials only living in cities, but 90% of them live in the suburbs or exurbs.”
That really surprised me—to think of Starwood, a private-equity behemoth, as a country mouse. But as an industry leader and bellwether, it’s leading a charge and a change in thinking: Maybe the burbs aren’t so ugly.
The numbers back up this contrarian play. Exurbs and mature suburbs are growing much faster than city centers, as demonstrated by the incomparable demographer William Frey at the Brookings Institute, in an analysis of Census figures.
Sure, it might not be sexy—and it might not get as much air time at industry conferences—but the fact that our biggest market-rate owner is now fixing its sites squarely on the ‘burbs ... well, maybe it’s cool to be a country mouse after all.