Within the multifamily space, mid-rise apartments have enjoyed success, as luxury developments in urban areas have thrived. In the wake of COVID, however, garden-style communities are gaining investor attention, and for good reason. They deserve serious consideration for investment allocation.
Garden-Style vs. Mid-Rise: What’s the Better Investment?
The classic real estate mantra of location, location, location isn’t wrong, but perhaps a better description would be opportunity, opportunity, opportunity.
Mid-rise luxury, mixed-use development has long been a commercial real estate darling, but an August 2022 WealthManagement.com piece on the momentum of garden-style apartments noted that garden properties fetched lower cap rates than mid-rise and high-rise for the first time ever in the second quarter of 2022, citing the MSCI hedonic cap rate series, which pegged a 4.3% rate for garden-style versus 4.4% for mid- and high-rise during the period.
Driving this performance is demand for suburban locations after the pandemic. The ability to work remotely and avoid densely populated areas is an important factor, and the National Apartment Association (NAA) reports that garden-style properties built after 2015 actually saw a decrease in operating expenses, while the majority of other multifamily markets saw increases.
Another key point of comparison is turnover rates. According to the NAA, regions such as California saw turnover rates averaging as low as 40% for garden units, whereas mid-rise and high-rise properties in regions like Florida saw average rates as high as 55%.
Garden-style developments also tend to be more insulated from new competition. Land costs are often too high to fit fewer than a dozen units onto an average acre, and many suburban localities resist denser development, which limits new garden-style supply.
That said, mid-rise has its own advantages. Institutional interest and investment in mid-rise properties can provide more liquidity when it comes time to execute an exit plan, and mid-rise often offers the opportunity for mixed-use retail space, which provides some risk diversification and income while adding to the amenities tenants want. Amenities didn’t fare well during pandemic shutdowns, but renters are now back on the lookout for them as they try to stretch their dollar amid rising rents.
Rising Costs to Expect Either Way
Regardless of which property type an investor chooses, they should be prepared for rising costs across the board. NAA data shows that property taxes have increased for nine consecutive years, comprising more than 35% of total expenses and 13.6% of gross potential rent, and total operating expenses increased 2.6% year over year on a per-unit basis. Insurance costs haven’t been spared either, with a majority of NAA survey respondents reporting premium increases greater than 15%. Operating expenses also vary widely by market, averaging around $4,354 per unit in Las Vegas and upwards of $8,461 per unit in markets like Los Angeles.
The Bottom Line
Ultimately, both garden-style and mid-rise should continue to fare well as investments going forward. From a local perspective, the Harrisburg area provides ample multifamily investment opportunity: a December report by ABC27 noted that Harrisburg was the fourth most competitive rental market in the country, with 96.5% of apartments occupied and units sitting vacant for an average of just 33 days.
While there are real differences between garden-style and mid-rise, the most important factor is still the specific details of a given opportunity.
