Real Estate Forum

ers are starting to lower rental rates to maintain their absorption rates,” he says. “The good news is, they’re filling up.” But infill may not be quite as compelling if rents are lower. Though Zander Norris on the West Coast and Uranowitz on the East Coast note that pushing rents hasn’t resulted in much occupancy decline, Denton says core infill product is starting to feel the heat. “We suspect the urban core markets will get softer, with more rent growth in the class B and C categories, and suburbs as well,” Denton adds.

We’re also in a period in which there just
isn’t all that much infill product available
any more. “You have to remember that
when product is acquired, it’s acquired as
somewhat of a long-term investment,”
explains Gwin of SWBC. “Once that apart-
ment complex is bought, it might not come
back on the market for five years or longer.”
As investors were coming back to the mar-
ket in 2010 and 2011, it was that core, infill
product they were seeking out.”
The flight to quality among investors
coming out of the recession meant core
buys, Carroll observes. Infill was consid-
ered safer and less risky, as this seemed
to be where much of the renter demand
was centered. But the economy is recov-
ering and job growth isn’t taking place
simply in the CBDs. As such, “as the
recovery carries on, investors are becom-
ing more confident and will invest in

When you
build all-
urban,
you’re
delivering
the property
at the top of the market,
whereas in the suburbs,
you can spread the price
points around.”

JAY DENTON

Axiometrics Inc.

what they perceive as riskier,” he says.

Furthermore, Gwin points out, there is only a finite amount of zoned, developable land among the infill areas. “Most of the low-hanging fruit is gone,” he says. “These days, you have to look harder and work harder to build in the infill areas. You have to tear something down or rezone it.” For example, the above-mentioned Muse Museum District in Houston is being built on Richmond Avenue on what was once the site of a 1960s multifamily complex.

In short and for now, infill is still strong and, despite cap rate and yield compression, is a preferable investment. Yet the experts point out that suburban, secondary and tertiary markets are coming into their own.

“I definitely think infill is still the darling of investors,” Hendricks-Berkadia’s Norris remarks. “But as the market continues to heat up and as developers or yield constraints come into play, those infill locations are going to be less and less desirable. Suburbia will come into its own because price points of the product there will be more advantageous.” ◆