Forget Atlanta — Capital Cascades into Georgia’s Secondary and Tertiary Markets
Georgia’s secondary and tertiary multifamily markets continue to demonstrate growing attraction as capital flows from investors leaving the Atlanta metro area in search of higher yield transactions. The greater Georgia market, which spans the state excluding the 29-county Atlanta metro area, has become a destination for investment due to growing capital inflows to the Southeast and cap rate compression in metro Atlanta.
Multifamily transaction volume in the Southeast totaled $11.8 billion in second-quarter 2019, up 25 percent year-over-year, allowing more capital to enter Georgia’s secondary and tertiary markets. The trickle-down effect of investment into these markets, boosted by strong job growth and increasing renter households, works to promote a strong renter marketplace with increasing returns in the region.
Georgia markets demonstrated tightening fundamentals and noticeable rent gains in recent years, particularly south of Atlanta, due to supply-side pressure and limited new deliveries. According to CoStar Group, metro Atlanta delivered nearly 11,000 units, up 15 percent year-over-year through the second quarter, while Georgia’s secondary and tertiary markets delivered roughly 2,200 in total, down 40 percent.
Greater Georgia’s lack of supply has generated pent-up demand in multifamily, resulting in residents who are willing to pay more for higher value assets while landlords maintain low vacancy rates without much effort. Therefore, landlords can anticipate more pricing power for market rents in the foreseeable future.
According to Freddie Mac’s Apartment Investment Market Index (AIMI), Atlanta’s AIMI fell by 4.9 percent year-over-year through first-quarter 2019, with Freddie Mac citing declining value in the metro due to rapid property price appreciation and higher mortgage rates. This drop has resulted in cap rate compression and the offset of growth in net operating income, making it favorable for more investors to look outside the Atlanta metro.
Real Capital Analytics reports the average cap rate in Atlanta as of second-quarter 2019 is 5.8 percent, down 10 basis points from the second quarter of 2018. In contrast, Georgia’s secondary and tertiary markets hold an average cap rate of 6.2 percent as of the second quarter of 2019, indicating higher yields on more reasonably priced property outside of metro Atlanta.
With CoStar showing the average sale price at $76,900 per unit, Georgia’s secondary and tertiary markets are more financially feasible for an investor not looking to spend top dollar on land value. Recent deal activity signals growing attraction to these markets, with $1.1 billion in sales volume on a trailing 12-month basis, up 17.1 percent year-over-year through July 2019.
Savannah and Augusta are leading Georgia’s secondary markets in terms of job growth and economic expansion. Savannah is experiencing a surge in population and employment primarily due to growing investments at the Georgia ports, with Moody’s Analytics reporting 1,200 new trade, transportation and utilities jobs added year-over-year through the second quarter of 2019. Savannah’s port access also serves as an indirect job driver for the industrial sector, with developers rushing to deliver 9.3 million square feet of industrial space through 2019 to meet market demand for production operations in the area.
Augusta’s job growth strengthened in recent years, leading Georgia’s metros in terms of percent employment gains and adding 1,100 net new jobs year-over-year through the second quarter of 2019. Led by the new Army Cyber Command Center at Fort Gordon and the Georgia Cyber Center downtown, cybersecurity continues to grow in the area and will be an ongoing driver of economic expansion and diversification in the Garden City. The upcoming $150 million Augusta University Medical Center will target increased healthcare demand in Augusta as well and add new jobs to the area.
Only 2,200 units have been delivered in Georgia’s secondary and tertiary markets on a rolling four-quarter basis, down 32 percent from the previous four-quarter period. Construction is also down at this point in the cycle, with 3,800 units currently under construction outside of metro Atlanta.
Newly constructed multifamily units in greater Georgia have become increasingly difficult to justify for a couple of reasons. First, secondary and tertiary markets are typically less attractive to developers compared to primary markets, even when they present strong market fundamentals and demand drivers such as population and employment growth. Second, suburban planning and zoning councils, at times, resist new development of multifamily housing, with concerns of overdevelopment and effects on infrastructure.
Both situational factors contribute to strong pricing power among landlords in secondary and tertiary markets, as constraints on new development leave renter households with limited alternatives or bargaining power. This trend is seen in Savannah, Augusta, Macon and Columbus, with rents growing between 3.4 percent and 5.7 percent year-over-year through second-quarter 2019 and projections expecting continued rent growth into 2020, according to Axiometrics.
Trends indicate that Georgia’s secondary and tertiary markets will continue to pull investment activity from metro Atlanta. Reasonable pricing and higher cap rates in markets outside of Atlanta allow investors to earn a higher yield on investment. The present and growing population and employment drivers in greater Georgia will promote a strong renter marketplace in the foreseeable future as rent gains will pervade the greater Georgia region due to limited construction activity, allowing for additional investment returns in the mid- to long-term.
— By Taylor Bird, Director, and Martha Kifle, Senior Research Analyst at Cushman & Wakefield’s Sunbelt Multifamily Advisory Group. This article originally appeared in the October 2019 issue of Southeast Real Estate Business.