Adler: Look to urban neighborhoods for steady returns

City neighborhoods, not central business districts, are a good bet for investment stability, said industry executives.

In the face of inevitably rising interest rates and frothiness in the real estate market, industry executives are seeking stable returns in the residential, rather than commercial, districts of US cities.

Speaking at the EisnerAmper Real Estate Private Equity Summit in New York on Wednesday, Dean Adler, chief executive officer and co-founder of Lubert-Adler Partners, said his private equity real estate firm is going back to its roots by scouting out cities’ residential neighborhoods, rather than its central business districts. To find value, he recommended following the trail of young professionals and families – which lead to apartment buildings, not to dense skyscrapers – for the intersection of desirable location and affordability. He referenced Chicago, where he said rents in desirable neighborhoods such as Wicker Park, Lincoln Park and Wrigleyville are 60 percent of the cost of the comparable apartments by the Loop.

“Urbanism is for real,” Adler said.

In the Windy City and elsewhere, Adler sees opportunity in combining low-rise multifamily residences with first-floor retail. That’s not an efficient operation, he said, for developers that own just a few properties, but as a firm that can achieve scale, Lubert-Adler can buy up multiple multifamily assets and lease to a variety of businesses, making the neighborhood more desirable for its retail access, Adler said.

Suburbs, Adler said, have poor prospects for multifamily properties because local residents often are opposed to apartment buildings, which are thought to attract an influx of residents that could potentially to overwhelm high-performing school systems. Ken Bernstein, the chief executive officer of Acadia Realty Trust, also noted that retail is moving from suburbia to urban cores after many companies built out their maximum store size in the suburbs in the past 20 years.

The panelists did not give a blanket endorsement to urban neighborhoods, cautioning against certain types of investments.

“The condo market is the most volatile,” said Richard Mack, the chief executive officer and co-founder of Mack Real Estate Group. “That’s the one that’ll move the fastest in the wrong direction.”

Condominiums fall into the discretionary category of development, along with resorts and other types of non-core investments. Adler warned that this category has grown quickly in recent years but could fall just as fast, as evidenced by condos built during the recession that still sit empty.

“Low rates can cover a lot of mistakes,” he said. If those rates go up and there is less financing for and interest in condos and other discretionary development, he said he predicts that firms that promised investors returns in the high teens may end up with gains in the low single digits.