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Atlanta Multifamily Market Continues Strong Performance in All Asset Classes

In 2016 and the first quarter of this year, Atlanta’s economy boomed, showing several positive signs that point to another banner year for the multifamily market. From December 2016 through February 2017, Atlanta added 96,700 total non-farm jobs, an increase of 3.7 percent over the same time the previous year. Additionally, in 2016 the city experienced 3 percent wage growth overall.

This translates to a robust multifamily market with solid fundamentals. According to Axiometrics, Atlanta’s average effective rent broke the $1,000 ceiling in second-quarter 2016 and has not stopped climbing since, reaching $1,068 as of first-quarter 2017. Rents are projected to increase by just under 5 percent in 2017.

Josh Goldfarb, Cushman & Wakefield

Josh Goldfarb, Cushman & Wakefield

While the market’s rent growth rate is slowing, we cannot forget that Atlanta is breaking historical rent records while maintaining an occupancy rate in the 94 percent range for the last 11 consecutive quarters. Throughout the city, all asset classes — from Class C suburban properties to trophy Class A properties in the urban core — are posting strong performances.

One trend we are keeping an eye on is single-family development, which is starting to come back as rental rates continue to rise and renters look to make a more permanent move. Despite growing homeownership appetite in Atlanta, traditional barriers to entry persist, including increasing home prices (6.5 percent year-over-year increase as of February 2017) as well as the upfront down payment and closing cost hurdle, which exceeds $29,000 for a median-priced home with a 10 percent down payment.

Kristina Garcia, Cushman & Wakefield

Kristina Garcia, Cushman & Wakefield

More importantly, demographic trends demonstrate that renter demand will remain robust even with a projected pendulum shift back toward homeownership among millennials. The metro Atlanta area is projected to add approximately 69,000 renter households through 2021 with positive net in-migration from major metros such as New York, Chicago, Washington, D.C., and Los Angeles driven by “blue chip” employer growth.

Apartment development in select submarkets is teetering on oversupply, which is spurring lease-up concessions in West Midtown, Buckhead and Midtown. Concessions have moved into the 2.5 percent range as of first-quarter 2017, but the prevalence of concessions is largely tied to the absorption of new supply and has yet to penetrate lower tiers.

As in-town multifamily construction nears its saturation point, the suburbs have been hot for development of product attached to walkable mixed-use town centers. Developers and owners are seeing rents high enough to justify new development in suburban markets because of the lack of new supply.

For example, 224-unit Avonlea Station recently opened in Suwanee, a northeast Atlanta suburb in Gwinnett County. What once was a rare or nonexistent offering in the suburbs, developments like these are not forcing renters to compromise as they can remain in place and live in newly constructed, walkable communities. Avonlea Station residents can walk to the city’s town center, the Suwanee Creek Greenway and a plethora of shopping, dining and retail. Rents range from $1,210 for a one-bedroom, one-bathroom apartment to as high as $1,830 for a three-bedroom, two-bathroom apartment.

Phase II of Avalon, located in Alpharetta, opened in April and includes 276 multifamily units known as Veranda at Avalon. Rents range from $1,525 to $4,884. With average rents in the $2.40 per-square-foot range, Class A suburban product such as Veranda at Avalon are keeping pace with core product in Buckhead and Midtown, demonstrating the untapped value potential of these submarkets.

Additionally, suburban markets like Douglasville, McDonough, Conyers and Norcross, where apartments were developed before the downturn, are experiencing elevated rent uplift via asset repositioning and renovations. The relative lack of new product in these submarkets has prevented a rent ceiling from forming that would otherwise moderate rent growth. Therefore, we are seeing an inverse relationship between product quality and rent growth trajectory. A property built in the 1970s near the airport is likely to have steeper rent growth rates than new product on the Atlanta BeltLine. Lower quality properties are able to play catch-up given the market’s favorable conditions.

Assets that were acquired within the last two or three years have enjoyed better performance and are capitalizing on factors that have created an all-time high in value. The pace of investment sales has been brisk, and pricing continues to rise in step with performance and continued historically low interest rates. Contrary to trends in 2012, prospective owners now have a buffet of lenders to choose from with attractive loan programs that allow them to afford higher-priced assets. While construction loan financing is tightening due to High Volatility Commercial Real Estate (HVCRE) regulations on the one hand, acquisition financing is plentiful on the other.

Foreign investors are still very active in the city, particularly those from Canada, Asia, South America and Israel. We also have seen an influx of domestic buyers from cities like New York, Los Angeles and Dallas. Multifamily investors have become accustomed to record-breaking rent growth rates in this cycle and therefore have been more hawkish in early 2017. However, when taking a step back and considering the bigger picture, the percent returns that multifamily investment provides still have an edge over other investment options, which is fueling the formation of new multifamily funds with targets across the United States.

Overall, the outlook for the multifamily market remains very positive as long as the city’s economic drivers continue. As the gateway to the South, we expect nothing less.

— By Josh Goldfarb, Vice Chair, and Kristina Garcia, Senior Marketing Specialist, Cushman & Wakefield. This article originally appeared in the May 2017 issue of Southeast Real Estate Business.

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