What’s Going On? Are Suburbs or Cities the Place to Invest?

Overview

So, the big story in the spring was that cap rates were suddenly neck-and-neck for garden- style and high-rise apartments. Generally, you find mid-rise and high-rise buildings in urban locations and garden-style apartments (and mid-rise) in the suburbs.

What’s happening is one of two things – or maybe a bit of both. Either high rises are cheap on a relative trade basis or the suburban markets are outperforming the urban markets. It’s hard to say which of those is driving cap rates to come together.

At some point, the cost advantages of the substantially less expensive Southeast markets may diminish because prices have risen a lot. Even though the quality of life is still very attractive, the affordability component may become less compelling.

On the other hand, some of the urban centers are really struggling with things that have diminished their quality of life such as crime and homelessness. In addition, commercial employment and corresponding retail have disappeared from many urban locations.

I try not to make too many forecasts, but generally I think suburban markets will continue to outperform most urban markets. We think that valuations of suburban multifamily buildings, especially in the Southeast, remain compelling.

But what’s more important is this: it doesn’t matter. If you’re a smart investor, you’ll come out ahead whether the forecast is right or wrong.

We like to buy and hold apartments in the Southeast. If you’re holding your property for a long time and don’t have a pending maturity, it doesn’t matter if cap rates rise. It’s not a real issue if your cash flow is still good. Cap rates really only matter if you have to sell or refinance a property.

We’ll continue to stick with our strategy. We play a long game and that works for us.

But if we’re wrong, that’s OK. We’re cash flow-based investors. If cap rates do rise, that’s OK, too. Our cash flow will continue to rise. Values will eventually increase again, too. Better yet, we just don’t have to worry about loan maturities.

Cap rates for garden-style apartments and mid-rise and high-rise apartments may revert to past performance and diverge. Whether cap rates end up higher for garden-style apartments or not, our investment strategy will stay the same.

The truth is investors need to be mindful of the fact that no one will know until they look into the rear-view mirror which forecast was correct. The better approach is a strategy that lets you win no matter what the forecast says. No one who ever saved for a rainy day was upset when the sun came out.