When making decisions for a long-term hold, there generally is more confidence to deploy capital in the urban core because of their perception as the stable economic anchors in local economies. However, that is changing as the current cycle wears on and as investors are turning their attention to suburban assets.
Apartment transaction data from Real Capital Analytics shows that increased investment in the suburbs is causing prices for those assets to rise and cap rates to fall. Meanwhile, the volume of urban core assets available for purchase are scarcer, both from an availability and pricing standpoint. In turn, appreciation in the urban core has stalled and cap rates have remained at low levels. These trends have resulted in prices and cap rates narrowing among urban and suburban areas.
Among the top 50 U.S. markets, excluding New York City, appreciation for all apartment assets has picked up significantly since mid-2014. In total, the average price per unit bought and sold over that time has risen 45.6 percent, landing at $160,000 as of mid-2018. At the same time, cap rates have decreased 60 basis points, to 5.4 percent.
These overall trends mirror movements seen in the suburbs. The average price per unit in the suburbs has risen 48.4 percent since mid-2014, compared to an overall increase of 22.1 percent for urban assets. Likewise, cap rates have decreased 70 basis points (bps) in the suburbs and only 20 bps in urban areas.