While COVID-19 has slammed many parts of the economy, suburban apartments are performing well for one company.
Chris Berry, managing director and co-portfolio manager for Barings, says several of the firm’s close-in suburban multifamily holdings “have exceeded expectations since fourth quarter 2019.” Berry says that Barings these properties, some of which are located outside of Boston, Denver and Austin, have experienced increasing rents and expect to keep occupancies high.
These suburban properties often rent at a discount to urban apartments, which broadens the pool of potential renters. That’s valuable in times of economic dislocation.
“We see in our portfolio that the rents have been pretty strong in the suburban assets,” Berry says. “We’ve seen more strength in those suburban locations, and we’ve seen occupancies not really move at all. They are still very high for the suburban locations.”
Even before the current crisis, the suburban product is better positioned to weather the current storm because its cost basis is lower. “Most of the product you find in the CBD [central business district locations] is mid- and high-rise construction,” Berry says. “Land is costly, or it’s tougher to build in those locations. So you need pretty strong rents to make those deals pencil out.”
In the suburbs, the land is usually cheaper, and construction is less complex. “That has created a competitive discount for the suburban assets relative to the CBDs,” Berry says. “Now that everyone is so focused on affordability, you’ve got a broader pool of renters who are looking at those suburban locations.”
While suburban performance has been strong so far, Berry isn’t ready to declare victory. The economic dislocation caused by coronavirus could take years to play out.
“It’s very early,” Berry says. “Right now, I think everyone is looking to see what’s going to happen with this extension or non-extension of the benefits right now, which I certainly think needs to get done. Since the start of the pandemic, we’ve had 50 million people put in for unemployment. So I think we do need something right now.”
Berry says the high unemployment numbers highlight why people are focused on affordability. “That is why we think those suburban locations are doing a little bit better right now than the urban stuff,” he says.
Berry said Bearings’ primarily Class A portfolio has achieved 96 percent collections so far. “The renters who are in class A apartments can generally work from home, and they haven’t been as impacted by what’s going on in the economy,” he says. “In general, Class A is still doing pretty well, which is where we focus our attention.”
Barings, which represents a $45 billion global real estate platform, owns properties in both close-in suburbs and downtown areas. “If you were thinking about Seattle, we would go to a Redmond or Bellevue—somewhere that’s still close in and still has good access to jobs,” Berry says.