Shift Among Apt. Renters from Suburbs to CBD Paying Dividends for Landlords and Investors
Stubbornly high gas prices and gridlocked freeways have compelled younger workers and retiring Baby Boomers to rethink the suburbs as a place to live and work. As the apartment pipeline again fills to pre-recession levels, recent construction data shows that cities and forward-thinking multifamily developers are getting the message.
A CoStar analysis of apartment construction data since 2000 shows a significant shift over the last couple of years toward new multifamily projects located within walking distance of rail and bus lines. It also found that landlords such apartments collect higher rents and have higher occupancies than non-transit-oriented properties. These communities are often part of larger, pedestrian friendly transit-oriented developments (TODs) featuring a mix of office, shopping and entertainment districts encouraged by municipal planners as a key strategy to lure businesses, residents and visitors to revitalize urban and outer-ring neighborhoods.
From 2000 to 2010, less than 20% of new apartment units built were within walking distance of mass transit stations and stops. But the new wave of multifamily development is very different. Of the units under construction today across the nation, about 42% are within a few minutes’ walk of trains and buses, according to data presented recently at CoStar's Third Quarter 2012 Multifamily Review and Outlook.
CoStar analysts also found that developments near major transit fetch higher rent premiums and tend to have higher occupancies than non-TOD properties.
"Developers are smart. They are delivering [new apartments] into strength because these projects command higher rents," said Erica Champion, senior real estate economist with CoStar Group’s Property & Portfolio Research, (PPR) division. "One reason landlords have been able to achieve higher rents with these properties is that renters can afford more [rent] when they don’t have the added expense of a car payment every month."
In metros with mass transit available, effective rents per square foot for existing properties located outside of a realistic walking distance to transit are about $1.42 per square foot, while "transit walkable" properties average about $2.20 per square foot. New properties within walking distance of transit command an average of $2.70 per square foot -- a striking 90% rent premium over non-transit-oriented properties.
Not all of the projects along transit routes are upscale apartment communities with luxury amenities such as dry cleaning and concierge service. Luis Mejia, director of research/multifamily, noted that the new apartment supply "comes in different flavors," including properties with more affordable rents to accommodate the wave of younger households coming into the marketplace and other people with lower or moderate incomes. Mejia's comment underscores the need for owners and developers to diversify their portfolios by building size, amenities and design to meet the requirements of renters who prefer to trade luxury for location, especially if that location gives them an attractive transit solution.
Even properties where renters have to get into their cars and drive to work or shop have high occupancies of 96% in today’s tight apartment market. However, occupancies at newer transit-proximate communities are even tighter at 97.2% occupancy, a 120-basis-point increase.
Public Transit Helps Create Economically Prosperous Communities
The strong appetite for units located near transit is likely to remain strong, Champion said, pointing out that use of public transit has been steadily increasing over the past six quarters, with use of light rail (4.3%) and heavy rail (2.5%) up the most over the past year, according to a September report by the American Public Transportation Association (APTA).
Nearly 60% of the trips taken on public transportation are work commutes, noted APTA President and CEO Michael Melaniphy.
"Public transportation not only enables people to get to work, but development around public transit helps to create an economically prosperous community," Melaniphy said.
Not surprisingly, transit ridership is up in regions and local areas where jobs are increasing and the economy is rebounding, including the San Francisco Bay area, Los Angeles, Pittsburgh, Louisville, Salt Lake City, Denver, Boston, Chicago and Phoenix, Melaniphy said.
In those markets and others around the U.S., TOD projects are finding a warmer reception from state and local governments and planning agencies than apartment projects received in past economic cycles.
In the Boston metro area, for example, a state-approved incentive program to encourage "smart-growth housing" projects by paying communities to set aside land passed by the state of Massachusetts in 2004.
While it took time for initial construction to begin due to the recession, initial construction has started as of this year in more than half of the 33 smart growth "zoning districts" approved by the state, according to the Greater Boston Housing Report Card, released by the Dukakis Center for Urban and Regional Policy at Northeastern University. Altogether, over 1,200 housing units have been built with another 700 unit under construction or soon to be under way under previously issued permits.
Studies in the U.S. and Europe support the TOD investment premium findings. Great Britain’s Network Rail organization found in a report called "The Value of Station Investment" that among other economic benefits, transit stations at Manchester Piccadilly and Sheffield created a positive climate for investment for office space as well.
At Manchester, new and renovated offices are seeing rents increase by nearly $16 million annually, and values in the area are rising by 33%. Values near Sheffield Station rose by 65% between 2003 and 2008 near improved stations -- three times the appreciation of the Sheffield market as a whole. Overall, redeveloped urban transit stations can create value appreciation of 30% or more compared to those located elsewhere, according to the report.
According to a study on the impact of TODs in West Cook County, IL, by the Center For Neighborhood Technology (CNT), station areas where residents have low transportation costs and high buying power are most likely to support near-term TOD investment.
Certain station areas within the county have competitive advantages and could attract a greater variety of developments and promote greater mixing of land uses.
For example, while Rosemont, IL, has very low residential density, its abundant businesses and well-utilized transit station make for relatively low transportation costs for existing households. Developing more housing and retail within walking distance of transit would allow Rosemont to diversify and expand its sources of tax revenues, moving from a successful employment center to a more vibrant, mixed-use area in which people can easily get around without a car, according to the CNT study.