Multifamily Investors Find a Niche Play in Smaller, Low-Rise Projects

Developers are eager to build apartments in suburban areas—but land is hard to find.

Low-rise apartment developments with just a few buildings can help apartment investors break into the suburbs where sprawling, garden apartment properties don’t have space to fit in. These smaller deals also provide an opening for smaller investors to develop apartments with less competition from larger institutional investors who rarely focus on smaller deals.

Smaller low-rise properties with just a few buildings “can be developed as a high-density asset in denser suburban areas where garden apartments are is difficult to develop,” says Joe Biasi, consultant for CoStar Group.

Nearly a quarter (22 percent) of all proposed multifamily development projects were “low-rise” apartments in April 2020, according to CoStar. These projects are one to three stories in height—like garden apartment communities. But they don’t qualify as garden apartments, according to CoStar, because the properties include three buildings or less.  These “proposed projects” are in the early stages of development, where a site has been identified but no construction has started, according to CoStar.

Some of these proposed developments would fit a lot of apartments into a few, low-rise buildings. For example, CoStar is tracking a proposed, low-rise apartment development at 2800 N. Main St. in Santa Anna, Calif., large enough to attract institutional capital, says Biasi.

Most low-rise developments with less than three buildings are relatively small however. They average a third fewer units than the average proposed apartment development.

“That makes it easier for smaller investors to develop,” says CoStar’s Biasi. “Because of the limitations on its size, those assets are less likely to be institutional.”

Developers are working on far more of these smaller, “low-rise” properties than larger, garden apartment properties with more than three buildings. Just a fraction of the current proposed multifamily development projects (3.6 percent) are garden apartments even though garden apartments represent nearly half (49 percent) of the existing inventory of apartments, according to CoStar. (Most of the research firms that cover the apartment industry do not differentiate between garden apartments and “low-rise” apartments in their numbers.)

“Garden apartment development has great returns, but developers will often cite garden opportunities are only really available in the suburbs, and construction costs are really high,” says Biasi. “They could not find sites that were worth building garden.”

Other economists count more garden apartments projects in development – but only in particular markets and submarkets. “Though barely any garden apartment construction occurs in gateway metros, these low-rise projects still comprise a significant portion of the building activity in some metros that are fairly sizable,” says Greg Willett, chief economist for RealPage, Inc., based in Richardson, Texas. “Looking specifically at metros with lots of product on the way, a majority of the ongoing construction in metro San Antonio consists of low-rise developments, and these lower-density projects account for roughly half the stock under construction in metro Phoenix and Fort Worth.”

Even in these places, garden apartment only worked in certain areas. “Garden apartment development has great returns, but developers will often cite garden opportunities are only really available in the suburbs, and construction costs are really high,” says Biasi. “They could not find sites that were worth building garden.”

As a result, most new apartment buildings with less than three stories are built on the far edges of active building in a metro area. “In the exceptions, closer-in, low-rise developments tend to be luxury townhomes built over attached individual garages,” says Willet.

Developers are eager to build in these suburbs, where apartment rents have not fallen as steeply in the pandemic as they have in overbuilt downtowns, especially in expensive, gateway cities, economists say. The ideal development site is now a place in the suburbs with good amenities and good transit to downtown areas, according to Biasi.

Smaller, low-rise developments with fewer buildings can help developers to squeeze into exclusive, suburban areas that are almost built out. With just a few buildings in each development, low-rise properties tend to be small. The average low-rise development is expected to have one-third less units than the average proposed apartment development, according to CoStar. Low-rise can be fairly dense, so it can even helpful developers fit new development into urban areas like Brooklyn, says Biasi.