Why Rents in U.S. Suburbs Aren’t Falling as Fast as Cities

Once an escape from city prices, suburbs now present a challenging financial landscape for renters.

Why Rents in U.S. Suburbs Aren't Falling as Fast as Cities

Once an escape from city prices, suburbs now present a challenging financial landscape for renters.

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Good morning. Suburban rents, once cheaper than city rates, are closing the gap. Kroger and Albertsons advance their merger, divesting 400+ properties valued at $1.9B. Meanwhile, NYC unveils plans for 4,000 new apartments in central Brooklyn.

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Market Snapshot

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Pct Chg:
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FTSE NAREIT
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10Y Treasury
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SOFR
1-month
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*Data as of 9/4/2023 market close.

RENTAL LANDSCAPE

Why Rents in U.S. Suburbs Aren't Falling as Fast as Cities

suburbs in the US

For years, renting in the suburbs meant shelling out less than city rents. However, recent data indicates that this traditional disparity is lessening, leading many to wonder why.

From cities to suburbs: The pandemic saw many professionals with remote work opportunities move from city apartments to the suburbs. Driven by factors like high mortgage rates, increased home prices, and urban concerns such as crime, there's been a noticeable preference for extended renting in suburban areas. Consequently, while city rents rose by 20%, suburban rents surged by 27% since March 2020.

Suburban rents outpacing urban growth: Certain suburbs of cities like Atlanta, Detroit, and Seattle experienced rent jumps ranging from 15% to 21%. Over the pandemic's duration, suburban rent growth surpassed city rent growth by approximately 8 percentage points, marking an unprecedented peak. Although suburban rents remain lower on average, the difference has dwindled from 12% in 2019 to just 5.8% in 2022.

The impact of rising home prices: Skyrocketing home prices also play a crucial role in the altered rental landscape. With median home prices exceeding $400,000 and mortgage rates increasing, the typical American finds homeownership less attainable. Consequently, many opt for longer rental durations, reducing the available apartments for newcomers.

Rental construction lags behind demand: Another critical factor is the significant rental unit shortage that predates the pandemic. While the U.S. faced a deficit of approximately 6.8 million affordable rentals in early 2020, construction has since attempted to bridge this gap. Data from 2023 indicates that nearly a million new apartment complexes are underway, aiming to alleviate the shortage over the next couple of years.

➥ THE TAKEAWAY

Why it matters: The traditional gap in rental prices between city centers and suburbs is shrinking. Factors like pandemic-driven migration, soaring home prices, and a shortage of rental units play pivotal roles in this transformation. As new constructions progress, experts anticipate a cooling down of rent hikes, but the changing face of rental economics hints at a more balanced urban-suburban rental landscape in the future.

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MEGAMERGER

Kroger and Albertsons Divest 400+ Stores to C&S Ahead of Major Merger

Kroger and Albertsons Cos. are progressing towards their merger by offloading over 400 stores and distribution centers worth about $1.9 billion.

Deal details: The two supermarket juggernauts – Kroger, based in Cincinnati, and Albertsons, from Boise, Idaho – have inked an all-cash deal with C&S Wholesale Grocers. Located in Keene, New Hampshire, C&S is a wholesale grocery supplier and is among the largest privately-owned companies in the U.S. It presently oversees 160 stores under the Grand Union and Piggly Wiggly brands in regions across the Midwest, Northeast, and Carolinas.

Divestiture: As part of their merger strategy to alleviate Federal Trade Commission's antitrust reservations, the grocery titans are relinquishing 413 stores. These include brand names like QFC, Mariano's, and Carrs, as well as five private-label brands. The deal spans properties in 17 states and Washington, D.C., with significant store counts in states like Washington, California, Colorado, and Oregon. Additionally, there's a clause permitting the addition of up to 237 more stores into the deal, dependent on FTC stipulations.

Finding the right partner: Kroger's CEO, Rodney McMullen, emphasized the importance of partnering with an experienced buyer like C&S. While he lauded their dedication to upholding collective bargaining agreements, analysts, including Arun Sundaram from CFRA Research, hint at potential ongoing FTC concerns, including labor and pricing issues.

➥ THE TAKEAWAY

Big picture: To combat giants like Walmart and Amazon, Kroger and Albertsons aim to do whatever it takes to merge and compete. While an agreement could be finalized this week, regulatory concerns about market dominance persist. Kroger believes the merger will benefit communities by offering an affordable food alternative against non-union competitors. This follows Aldi's recent acquisition of 400 stores from Southeastern Grocers.  

MULTIFAMILY MOVES

From Warehouses to Residences: NYC's Bold Vision for Revitalizing Neglected Brooklyn Districts

A previously overlooked industrial section in Brooklyn, covering areas like Crown Heights, Bedford-Stuyvesant, and Prospect Heights, is set to experience transformation with the possibility of new housing units.

The proposed rezoning: The New York City Department of City Planning (DCP) proposed a plan to rezone this segment after a year of community consultations. The plan suggests the development of 4,000 new housing units, with approximately 1,200 being income-restricted due to the city's Mandatory Inclusionary Housing program. Currently, parts of this region, specifically sections of Atlantic Avenue, Grand, Classon, and Franklin avenues, are zoned for heavy industrial purposes.

Vision for a vibrant Brooklyn: DCP Director Dan Garodnick emphasized the benefits of the new zoning plan, highlighting that it will address outdated zoning restrictions that have prioritized vehicles over housing and pedestrians. The proposed changes will enable the construction of 18-story apartment buildings on Atlantic Avenue and 12-story residential structures on side streets, infused with retail spaces and community facilities.

Developments and commitments: The Bedford Atlantic Armory will be re-zoned for denser industrial purposes, allowing for broader community uses. Additionally, certain lots near Dean, Bergen streets, and Flatbush Avenue will be allocated for affordable housing projects. The city has also committed $23.5M to renovate St. Andrew's Playground and is considering further enhancements for street and bike lane infrastructure.

➥ THE TAKEAWAY

Zoom out: Mayor Eric Adams expressed optimism and commitment to the rezoning plan, emphasizing the dire need for housing in NYC. Having represented the Brooklyn community in various capacities over the years, he highlighted his longstanding advocacy for such community investments. The proposed changes not only aim to tackle the housing deficit but also promise a more vibrant and well-connected Brooklyn.  

✍️ DAILY PICKS

  • L.A. stalemate: As lending opportunities wane and profit margins evaporate, developers in LA are hitting the pause button and considering ventures elsewhere.

  • Rent dispute: San Diego is suing SeaWorld over $12M in unpaid rent related to the theme park's lease of city-owned waterfront land, which was deferred during the early pandemic months.

  • Leadership update: US investment manager PGIM has named Eric Adler as the president and CEO of PGIM Private Alternatives, a new unit covering the real estate and private capital sectors.

  • Tax law: The U.S. commercial real estate market's uncertainty could result in increased distressed sales and portfolio shifts. For foreign investors, the tax implications could be complicated.

  • Office evolution: Much like malls in the past few decades, outdated office buildings are now grappling with maintaining their relevance.

  • Cloudy forecast: Hotels enjoyed a prosperous summertime, but by July, challenges arose, especially for budget accommodations. CBRE's latest prediction suggests potential property distress and decreased growth ahead.

📈 CHART OF THE DAY

the hiring boom is over

After the end of Covid-19 restrictions, businesses faced labor shortages, prompting higher wages and bonuses. However, with economic demand slowing due to rising interest rates, hiring has decelerated. As more diverse groups re-enter the workforce, job vacancies are being filled.

Economists believe this labor market stabilization may lead to a "soft landing", reducing inflation without causing a recession and easing pressure on the Federal Reserve to hike interest rates.

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