How can the depressed metro Atlanta office market, which is reeling from a vacancy rate of approximately 21 percent, benefit the apartment sector in the long run? Office concessions hold the key, says one prominent multifamily executive.
To attract new tenants and reduce vacancies, office owners will need to grant more concessions, which in turn will spark job growth and buoy the apartment sector, says Bennett Sands, development director for Wood Partners. The Atlanta-based company is one of the largest multifamily developers in the country.
“Couple that with the fact that Atlanta has a very well-educated younger cohort. There are a lot of reasons for businesses to come to Atlanta, and they will. We are just a little behind everyone else,” says Sands.
The comments from Sands came Tuesday during a panel discussion focusing on apartment development as part of the Interface Multifamily Southeast Conference. Sponsored by France Media, the event attracted approximately 300 industry professionals who gathered at the InterContinental Buckhead Atlanta.
Early stages of recovery
Atlanta’s apartment vacancy rate currently stands at 8.4 percent, down from 10.6 percent a year earlier, according to New York-based Reis. Nationally, the vacancy rate is 5.6 percent. On the recovery continuum, Atlanta’s apartment market trails Texas by about 2 years and is 1 year behind Charlotte, Sands believes.
Construction starts undertaken early in this recovery will do extremely well, Sands told the audience. “At that point, capital will start flowing back into Atlanta, and then we’ll overbuild. There will be another bubble and another cycle, but I think now is the time to be developing.”
Wood Partners isn’t standing still. This summer, the company completed development of Alta Glenridge Springs, an upscale, 168-unit apartment community in Sandy Springs, Ga., an affluent suburb of Atlanta. The 205,000-square-foot mixed-use project includes 175,000 square feet of residential space and 20,000 square feet of retail space.
Where are the jobs?
Panelist Fred Schreiber, senior vice president of Chicago-based AMLI Residential, which focuses on development, acquisition and management of luxury apartment communities, said that Atlanta is one of approximately 10 markets in which the company operates. However, The bad news is that the market is currently the lowest on AMLI’s investment priority list due to the lack of job growth.
Total nonfarm employment for metro Atlanta stood at 2,237,100 in August 2011, a decrease of 30,800, or 1.4 percent, from 1 year earlier, according to the U.S. Bureau of Labor Statistics.
Schreiber is bullish on Texas, particularly the cities of Austin and Dallas, because the state is generating a healthy number of jobs. He also strongly favors gateway markets such as Seattle and Southern California. Class-A apartments in those markets are trading at capitalization rates as low as 5 percent. (The lower the cap rate, the higher the purchase price.)
It’s not as if Atlanta lacks growth drivers, said Schreiber. “Atlanta is a low-cost city, an attractive city for employers to relocate to.” Still, Atlanta is plagued by transportation, education, and water-related issues, he added.
Robert Kadoori, senior vice president in CBRE’s debt and equity finance multihousing group in Atlanta, expects construction activity to remain quite limited for the foreseeable future given the weak job market.
“If you go back to 1995, up until the crash Atlanta was starting about 12,000 to 13,000 units a year. That’s a healthy number. At the time we were delivering 60,000 to 80,000 jobs a year,” recalled Kadoori.
“This year we’ve had about 3,800 unit starts. That’s about 30 percent of our historical number. Is 3,800 to 4,000 the new normal?”
Rising from the ashes
The panel noted that South Florida, one of the worst hit apartment and condo markets leading into the Great Recession, is now perhaps the hottest market in the region from an investment standpoint.
“A big problem in that market was the condo oversupply, the shadow market,” said Schreiber. “A lot of that product has been sold and absorbed. A lot of it is Latin American money coming into the Southeast into gateway cities, Miami in particular.” Some of these investors are plowing money into the apartment and condo sectors as a hedge against their own currencies.
Although the expansion of the Panama Canal won’t be complete until 2014, the project has already led to increased investment in the industrial sector in South Florida, East Coast ports stand to gain a boost in cargo business as large ships will be able to cross the passageway from Asia.
Joining Sands, Schreiber and Kadoori on the development panel were Bill Hargett, development partner for Atlanta-based Oxford Properties; Hudson Hooks, development partner for the Southeast region of Irving, Texas-based JLB Partners; and Steve Pepper, partner with the Atlanta-based law firm of Arnall Golden Gregory LLP. Christina Graham, a newly elected partner with Atlanta-based Morris, Manning & Martin LLP, served as the moderator.
— Matt Valley