The Yin/Yang of Apartment Building finance: Urban Equity v. Suburban Debt.

[Urban] TOD (Transit Oriented Development) has performed better and has a sexier image with many institutional investors. But while equity investors continue to favor urban TOD, developers are having a more difficult time finding construction debt at leverage levels that would make those deals pencil out.

Urban Apartment Building Investments

Meanwhile out in the ‘burbs: “On suburban sites, you see yields in the 7 to 8 percent range. On the core infill, you’re really building to a 5, 5.25 percent, maybe, and that’s getting dangerously close to acquisition cap rates.”

Suburban Apartment Building Investment

“We’re in an interesting situation now, where anytime you have a suburban, higher-yielding development, you can pull out a dozen lender term sheets, and the work has to happen on the equity JV side,” says Ramsey. “And it’s reverse for the infill TOD locations—usually we have strong interest from equity but a difficult time pushing the leverage to a point where we could get the returns we need for that equity.”

What does that mean for us ‘small’ apartment building investors? I definitely focus on properties near existing transit lines as access to good public transportation will rank higher and higher with renters as gas prices and congestion continue to rise; especially in the class B properties where we typically find the best value. That goes for both urban and suburban properties. With suburban properties we’re also looking closely at the walkability of the property.

What advantages are you finding in suburban vs. urban properties?

See the complete MFE Magazine Online article here: Urban Equity, Suburban Debt: Safety vs. Higher Yields

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