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updated: 6/15/2016 11:13 AM

Rental housing is here to stay in vibrant suburbs Suburban Chicago apartment rental trends point to opportunities for investment in fast-growing suburbs, with vibrant downtowns and schools

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  • David Scherer

    David Scherer

 

Newsweek recently described Americans as "streaming to cities like ants to a dropped Popsicle." But the suburbs are a long way from dead -- a point driven home by a recent report from NYU Furman Center showing that more suburban residents are renting, even as rents rise.

In suburban Chicago, 25 percent of residents rented their homes in 2014, up from 20 percent in 2006. We can thank the finances of homeownership since the mortgage meltdown and an inadequate inventory of affordable homes for this phenomena.

But judging from Origin Investments' experience with a multifamily development in Naperville, more factors are in play than costs and a temporary housing shortage.

We are investing in prime, suburban Chicago apartment buildings for four reasons:

1. Challenges in Chicago's public schools

The suburbs are more attractive because of Chicago's financial problems, especially as they relate to the public schools.

Chicago Public Schools' February borrowing closed at 8.5 percent, a junk-bond rate that rivals Puerto Rico's, notes Reuters. More significantly, the school district's bond contracts include an "ad valorem tax," notes the financial services giant Fidelity Investments. It is based on the assessed value of real estate and "not subject to property tax caps that non-home-rule units like CPS fall under for operating purposes."

This means borrowers can force a property tax increase in Chicago if CPS fails to pay. And it makes suburban schools, whether in Naperville, Oak Park or Evanston, look much better by comparison.

2. Student loan debt

Student loans put an added burden on people starting their careers. The nonpartisan Institute for College Access and Success says indebtedness at graduation has risen 56 percent in a decade, which compromises millennials' ability to buy homes. It also may affect act their ability to afford Chicago's higher rents. A January report from apartment rental website Zumper put the median monthly rent for a Chicago one-bedroom at $1,970, while the median cost for one-bedrooms in the suburbs is only $1,100 a month, according to Appraisal Research Counselors.

3. As millennials age, they're going to head to the suburbs.

These suburbs won't look like the ones of yore, however. The suburbs that will thrive the most will have a transit station, preferably a 20-minute ride or less from downtown; a little downtown of their own; and mixed-use buildings, often apartments with ground-floor retail, surrounding the transit hub, according to Urban Land Institute's 2016 "Emerging Trends in Real Estate" report.

The report also shows that "a smaller number of millennials prefer to live in the city than currently do, and conversely, a larger number of millennials prefer to live in the suburbs than currently do."

"There is enough of this 80 million-plus generation intending to relocate to the suburbs to make an impact," the report points out.

4. A massive supply-demand imbalance.

The above description sounds an awful lot like suburbs such as Naperville, Illinois' second fastest-growing city, according to Census Bureau figures and one with a vibrant downtown. Also, Naperville's school system ranked eighth on the 2016 best Illinois school district list from school-ranking site Niche. Yet Naperville data shows the city issued no building permits for condominiums or apartments in 2014 or 2015.

Why? Well, the going rental rate for apartments in Naperville -- at $1.20 to $1.80 per square foot -- simply isn't enough to justify the cost of new construction. Developers wouldn't be able to recoup their money.

This leaves a huge opportunity for existing owners of suburban rental buildings, and with Naperville's Iroquois Club, it's an opportunity Origin is seizing.

More broadly, we encourage real estate investors not to blindly follow the trends.

• David Scherer is co-principal of Origin Investments and co-founder of the nonprofit One Million Degrees.