Korman Communities' Co-CEO Brad Korman discusses trends in urban and suburban rental markets
Urban multifamily apartments are growing faster than suburban apartments due to Millennials, but the pendulum eventually will swing back to favoring the suburbs
Both urban and suburban apartment residents seek walkability, convenient amenities, and outdoor spaces
Urban residents also want building amenities that compensate for smaller apartments
Suburban residents also want easy access to transportation, open space, and good schools
Apartment residents today are looking for the best features of both urban and suburban living, no matter where they live, says Korman Communities' Brad Korman. Since residents' tastes have, for now, turned toward city living, satisfying residents' demands presents a challenge for developers.
Over the last five to ten years, tenant tastes have shifted toward urban living, driven mainly by Millennials. This trend to cities is not permanent, Korman says, and eventually will reverse when urban land prices and construction costs rise and returns fall, chasing development to the suburbs. In addition, Korman believes that once Millennials have families, they will move back to the suburbs in search of more space and better educational options. Korman notes that, even today, the absolute number of new apartments still is growing faster in the suburbs than in the cities.
The challenge for developers is to provide the urban renter with some suburban amenities and the suburban renter with some urban amenities, Korman says. Both urban and suburban residents want walkability, outdoor spaces, easy package delivery and storage, bike sharing and car sharing, and high-quality apartment finishes. But urban renters generally want to live near their jobs and value walkability. In urban properties, developers can compensate for smaller apartments with amenities that give residents things to do outside of their apartments, such as restaurants, balconies, rooftop decks, and energizing lobby spaces.
Most suburban renters today are no longer looking for out-of-the-way, bucolic locations. Instead, they increasingly prefer an urban location in a suburban setting, and gravitate toward live/work/play town centers, walkable neighborhoods, and areas with easy access to public transportation or highways. Nonetheless, suburban residents still are looking for more space and often seek out particular neighborhoods or school districts.
Whether in the suburbs or cities, having your properties in good locations still is critical, Korman says. In Korman's business of short-term luxury furnished apartments, that mandate translates into a focus on markets that cater to transient visitors and international travelers, such as Manhattan, Beverly Hills, Washington, D.C., Philadelphia, Miami, San Francisco and London. Within those markets, Korman chooses locations where people most want to live, such as Central Park, Sutton Place, Times Square or Rittenhouse Square.
Zell/Lurie: We're here today with Brad Korman, co-CEO of Korman Communities. Brad, thanks for talking with us.
Brad Korman: My pleasure. Thanks, Todd.
Zell/Lurie: Brad, Korman Communities has properties in both urban and suburban markets. Do you think they need different products? For example, design or amenities? And do you target different kinds of renters in those markets? Or is your approach similar in both places?
Korman: Well, there are definitely some differences but some similarities as well. Clearly, when you're building something in an urban location, you're paying more for your land and your construction costs are higher. So you're mindful about every square foot — units typically are smaller. They still have great finishes, but you're not giving as much square footage to people in their unit, so you try to make up for that in other areas: great balconies; great rooftop decks; really energizing and activating lobby spaces; retail tenants who are providing food services, athletics, or some other entertainment; fitness centers; a movie theater; massage therapy rooms; or golf simulators. Something that gives the urban resident something to do outside of their space, because their space and their square footage are very valuable. That's the difference for the urban renter.
In the suburbs, we can give more space. We can spread them out a little bit more. We still have great amenities. A lot of those amenities are outdoor spaces: swimming pools, fire pits, fitness trails, and things that lend themselves to a suburban setting.
The interesting thing is, some of the amenities you're giving, you're trying to give suburban amenities to the urban renter, and urban amenities to the suburban renter. So you're giving the urban person some outdoor feelings, and giving the suburban renter some urban feelings, such as walkability.
As for things that are the same? Package storage is huge at both properties right now for renters. People are shopping online, so how do you get packages from a delivery truck into your building and to your residents? Bike sharing, car sharing. Great amenities and great finishes are important to both sectors. So there are some similarities, and some differences as well.
Zell/Lurie: Is the urban tenant base similar to the suburban tenant base, or are they different clienteles?
Korman: Depending on need, it's really different. We're seeing less families in the urban locations than in the suburbs. Often the person in the city is walking to work. They want to be somewhere near their employment and they're looking for the convenience of walkability. The suburban person's looking for a little more space. They might have a car. They might be working further away, but they want to live in a certain neighborhood. So they're willing to sacrifice proximity for other conveniences and amenities close by.
Zell/Lurie: One thing that always comes up when I talk with students at Wharton is whether the pendulum is swinging for the long term away from suburban living, and toward urban living. What are you seeing in your properties? And what do you think the future looks like?
Korman: Well, your students are absolutely right. In the short term, the pendulum has swung to urban living. We've seen it over the last five to ten years, with the number of multi-family starts: The percentage growth is heavily-weighted to the urban locations. The absolute number of new apartments, though, still heavily favors the suburbs, just by mere size. But there's been a shift, and it's been something that has been in the works, and I think will continue for a little while longer. It'll happen until supply starts exceeding demand. As land prices go up and construction costs go up and returns go down, capital will chase returns back out to the suburbs, and we'll see a shift back outwards.
And I think also, once you see your Millennials, who are a big driver of the urban movement — once you see them get married, have families, all of a sudden they want either more space, or maybe they want educational options that they think are better in the suburbs than what they have in their urban core. Those are the things that will start shifting things back out to the suburbs. But in the meantime, right now there's been a push to urban living.
Zell/Lurie: Your urban properties are in a pretty select set of markets. How do you decide which cities to focus on?
Korman: Our urban AKA Portfolio is focused on luxury serviced residences, furnished apartments. We really focus on those markets that cater to transient visitors, to international travelers. Those markets are typically a little more expensive than other urban locations, so they lend themselves to gateway markets. We'll be opening our fifth property in Manhattan later this month. We have properties in Beverly Hills, in Washington, in Philadelphia, in London. We're spending some time in San Francisco and Miami. Those are the kinds of markets that work for us, because we want to be where people are coming and going — not necessarily living in the same apartment for years at a time, but really there for months at a time.
Within those markets, what are the great locations? Whether it's Central Park or Sutton Place or Times Square or Rittenhouse Square, or DC, or Beverly Hills, we want to be where people want to live. It allows us to pay more for the product, to invest more in the asset, and then realize a higher return on those properties. So that's what we focus on there. They are great locations. But it's on purpose, and it's really focusing on transient users.
Zell/Lurie: So that explains the urban location choice. What makes a good suburban location for you?
Korman: Good suburban locations really are focused around a couple different things. Some people are focused on school districts and transportation hubs: transit-oriented, train stations, great intersections of the highways, where people can have great access to get to their jobs and other amenities. For others, it's really focused on lifestyle. So, live-work-play, town centers. We're about to break ground in King of Prussia, which is two-million square foot master-planned community right next to the second-largest mall. It will have retail and restaurants and shopping and office and housing. And some people, that's what they want. It's that urban location in a suburban setting that is attractive to them. The days of being in that bucolic, set-away, far-out-of-the-way location for privacy, isn't really what suburban users, renters, are looking for today. They want to be in the suburbs, but really walkable or transit-oriented to the amenities and the lifestyle.
Zell/Lurie: Brad, thank you very much for talking with us today.
Korman: My pleasure. Thanks for having me.