Suburban Multifamily Is In For A Hot Summer, But Its Long-Term Future Is Less Clear
An influx of demand for housing has driven leasing volume and investment dollars up in New York City's northern suburbs.
Doubtful that the boom will continue to this extent in the future, Westchester and Fairfield County apartment developers are currently feeling the heat of a suburban rental roar with hopes that at least some of the demand will stick around for good even after summer ends.
“I don't really expect to continue to see lease-ups at 50 units per month, so I do see that coming down eventually. I'm hoping to catch that wave a little bit,” LMC New York Tri-State Divisional President Greg Belew said during a recent Bisnow digital summit. “I think that to some degree, there probably will be structural shifts that last … and if [people] don’t have to commute into the city every day, I think that changes the calculus a little bit, too, as to where they’re located from a living standpoint.”
The average rent in the New Haven-Fairfield metro area went up 1.5% year-over-year in the first quarter, even as thousands of units are added to the market pushing vacancies up slightly, according to a Marcus & Millichap report. Meanwhile, landlords say over the past two months they've seen an unprecedented flurry of leasing activity.
As many stayed put to wait out the coronavirus pandemic, turnover in developer Jonathan Rose Cos.’ suburban portfolio went down, Managing Director of Asset Management Caroline Vary said during the event. In a typical year, the landlord expects 31% of people to move out of apartments, but last year that number dipped to 22%, Vary said.
Thirty-eight percent of tenants renting across the multifamily portfolio in the area are relocating from New York City, more than in years past, she added.
“The rental market remains strong in our area,” Vary said. “During Covid, we experienced a slight slowdown and less turnover because people were staying in place … We’re now starting to see that typical turnover, and we’re leasing very quickly. Units are being leased within a week’s time.”
Nearly every unit Fowler owns is currently occupied, he said. Spinnaker currently operates over 400 units in the area across the towns of Norwalk, South Norwalk, Fairfield and Bridgeport, its website shows.
“As a portfolio, I can say we’re 100% leased, and I don’t think I’ve ever remembered being 100% leased,” he said. “Never been that.”
So far, rent prices across the developer's portfolio have remained largely unchanged, Fowler said, with asking rent for renewals about 2% to 3% more than they were in the prior lease, but Fowler said landlords may start to try to push rates up in the coming months if occupancy remains this high.
Marcus & Millichap researchers predict 2021 rent rates will rise 3% year-over-year.
LMC is signing double the number of leases it did pre-pandemic at several of its rental buildings in Stanford, Belew said, closing 40 to 50 leases per month.
“I think that people are still continuing to leave the city and look for a more affordable alternative,” he said.
JLL Senior Managing Director and New Jersey co-Head Jose Cruz said investors are trying to seize on booming rental demand in the suburbs with some first-time suburban buyers making deals as leasing volume increases.
In a deal Cruz brokered, he said a New York City-based real estate investor paid $75M for a multifamily building in Stamford, Connecticut, a few months ago with help from a British firm to finance the deal.
“Capital is coming into these markets … It’s new capital,” Cruz said. “With assets that we're selling now, whether it's Westchester or Stamford or other parts of Fairfield, the capital that's coming in is insurance company capital that's underwriting these markets. And we have always seen private capital, but now we've seen offshore accounts.”
While Cruz expects the market will remain hot throughout the summer, there is hesitation about what happens come fall, he said. With the cold weather could come rising interest rates, changes to tax policy or even another Covid-19 resurgence, he said.
Despite all the positive indicators right now, developers are still unsure how much of this demand for suburban apartments will remain in the long term, as the return to office shakes out.
All on the panel anticipate that while demand is probably close to a peak, the appeal of the suburbs won’t go away.
“We had a rush to leave New York. We're probably gonna have a mini rush to get back to New York at some point,” Fowler said. “However, people have found that the suburbs aren’t so bad … So I don't know that they all go back to New York. I think it's a little bit sticky. But it's not going to be quite as robust as it's been.”