Driven by continued job and population growth, metro Atlanta’s multifamily market remains strong. Rarely a week goes by without an announcement of another corporate relocation or expansion somewhere throughout the metro area.
This, in addition to an increasing population seeking the region’s quality of life, relative affordability and dynamic economy, has sustained the current cycle of development in the multifamily market.
Brett Duke, Atlantic Pacific Real Estate Group
Investors appear to share this conclusion and have made Atlanta a top destination for acquisitions over the past several years.
Despite some potential challenges on the horizon, namely rising construction costs, metro Atlanta’s apartment market is poised to continue its expansion over the near term.
Market Fundamentals
While new supply has outpaced absorption, most data providers still show metro Atlanta’s overall occupancy rate above 94 percent. Many market observers estimate that the multifamily market is on the cusp of, or has just moved past, its short-term peak of deliveries.
Spiraling land and construction costs, coupled with the current labor shortage being felt across the economy, are acting governors of future supply expansion. These increases in costs are also translating into much higher required rents, which are testing the size of the renter pool capable of affording them.
Despite concerns over new supply, metro Atlanta’s population growth remains a positive driver of the multifamily market’s fundamentals. In fact, the metro area ranks in the top 10 for population growth among other major metro areas throughout the United States.
Overall population growth and recent economic development successes like Starbucks Coffee, Inspire Brands and ThyssenKrupp Elevator Americas, which represent over 2,000 new jobs, and others should provide the momentum needed to absorb any excess supply and keep a major disruption at bay.
Property Level Performance
The generally positive market fundamentals of the metro area should drive positive property level performance. However, a more granular look at some of the challenges bears mention.
Regardless of the class of apartments or investment strategy (core, core-plus, value-add or opportunistic) that buyers pursued over the past five years, the vast majority saw significant rent growth during that time period.
While some of this increase was undoubtedly the result of a normalization of rents following the Great Recession, rents throughout the metro area still outpaced the growth of residents’ paychecks.
This trend of increasing rents may be ending, not due to a rapid deterioration of market fundamentals, but rather rent increases have begun to surpass residents’ ability to pay them and are causing renters to seek more affordable alternatives, like moving from a Class A to a Class B property.
Furthermore, some owners are reporting increases in bad debt year-over-year, some as high as a 50 to 100 percent increase, which could be evidence of reduced affordability. While this trend is concerning, it does not indicate peak rents have been reached.
Rather, it may mean that owners and managers can no longer rely on the general market trend of increasing rents to meet their performance objectives. Instead, they must refocus on working harder to improve their property’s value proposition through improvements and controlling expenses in order to meet NOI goals.
Another challenge facing owners at the property level are inflationary pressures on capital and operating expenses. First, property renovations or value-added improvements are becoming more expensive due to the material and labor cost increases.
Also, property taxes continue to rise at levels not contemplated in acquisition pro-formas.
Finally, personnel costs for onsite management and maintenance personnel are elevating to a rate at which many management companies are struggling to adjust.
Due to an increasing number of properties across the metro area, and fewer individuals entering the property management or maintenance career fields, there is a battle for onsite talent that is affecting owners’ bottom lines.
Capital Markets
Nevertheless, multifamily continues to be a preferred asset class for investors due to its perceived lower risk, return history over the past seven years and robust debt market. Metro Atlanta has been an excellent source of above-market returns, and investors continue to be drawn to its dynamism and liquidity. However, investors have had to lower their return expectations as cap rates have compressed.
Regardless, investors’ appetite for exposure to Atlanta multifamily continues to be voracious, with assets for sale typically receiving more than 20 offers each. This desire for metro Atlanta apartments continues, despite the recent increase in interest rates. This level of demand bodes well for Atlanta’s multifamily market for the foreseeable future.
Summary
Overall, metro Atlanta boasts strong multifamily fundamentals and the market is generally expected to continue this trend. While certain challenges are emerging at this point in the cycle, the continued expansion of the overall economy, coupled with a high level of sophistication among local investors, should insulate the market from any significant disruptions.
Finally, investor demand in metro Atlanta is maintaining the region’s competitive pricing, as well as providing a level of liquidity that is attractive to investors around the world.
— By Brett Duke, Managing Director, Atlantic Pacific Real Estate Group. This article originally appeared in the October 2018 issue of Southeast Real Estate Business.