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Growth in Hot-lanta
Published: November 02, 2007
Powerful demographic and economic forces continue to attract investors to Atlanta's multi-housing market. Atlanta led the nation in population growth by adding nearly 1 million people from 2000-2006. The metro population now tops 5.1 million residents and is expected to add 100,000 to 150,000 people per year in the years ahead. The city is also one of the national leaders in attracting college-educated 25- to 34-year olds. People come for the lifestyle and the jobs. The metro workforce added 200,000 jobs since the end of 2003 for total employment of 2.6 million. Home Depot, UPS and Coca-Cola are joined by 10 other firms that together place Atlanta as number three nationally for cities with the most Fortune 500 headquarters.
Such exceptional demand-side fundamentals should support strong rent growth, particularly since new unit deliveries averaged only 5,600 apartment units annually from 2004-2006. In the first half of 2006, property performance improved broadly across the metro and appeared to validate that Atlanta was in full recovery from the market bottom in 2003. Performance gains from mid-2006 to mid-2007, however, proved inconsistent and highly dependent on asset quality, location and management. As of the fourth quarter 2007, many owners report record revenues and are bullish. Others are scrapping for modest gains. CB Richard Ellis has seen several operating statements from September that show an uptick in revenue, sometimes dramatic increases.
Economic rent (market rent adjusted for concessions and vacancy) is just now exceeding the levels achieved in 2000, despite the increase in people and jobs. Market occupancy lags potential with an average 93.4 percent for Class A and 92.8 percent for Class B properties.1 Households that opted to buy homes have siphoned demand that otherwise would have propelled apartment rents and occupancies to levels more appropriate for Atlanta's robust population and job growth. The rent vs. own dynamic is swinging back in favor of professional landlords, although it is too early to judge the degree to which multifamily owners will benefit. As for economic rent, new investors like the parity of 2007 vs. 2000 economic rent levels as an indication that Atlantans should have ample capacity for higher future rents.
Torto Wheaton Research (TWR) views Atlanta as a "back-loaded" market, with modest revenue growth similar to the national average for 2008-2009. From 2010-2012, however, TWR anticipates revenues accelerating to 5.3 percent annually.
Variation in submarket and specific property performance will increasingly be one of the most striking aspects of the Atlanta multi-housing market. In contrast to the characteristics that defined Atlanta as a commodity market in prior decades, rental demand will cluster into certain micro-markets. Midtown, Buckhead and several infill nodes are likely to outperform market averages over the longer term. Suburban locations such as North Fulton, Cobb, and portions of Gwinnett counties will continue to benefit from tight supply constraints. Pleasant surprises will emerge in some less discussed markets. For instance, Class A economic rents increased 13.7 percent in Decatur from year-end 2006 to mid-2007, while Class A properties in West Cobb were up 9.0 percent. Dozens of value-add investors across metro Atlanta are raising rents $75 to $250 per month as a result of successful asset repositioning.
New Development
A commitment to high-end, infill development has created a quality of in-town living that was conspicuously absent just a few years ago when one compared Atlanta to other great U.S. cities. Large-scale, mixed-use developments such as 12th & Midtown, Streets of Buckhead, High Street and Atlantic Station are transforming the urban submarkets into more livable, higher density and more expensive urban centers.
For example, The Atlantic, a 46-story, 401-unit luxury condominium with average unit prices over $600,000 in the multi-billion-dollar Atlantic Station development, broke ground earlier this year and became the fastest-selling condominium project in Atlanta for the first half of 2007.2
Metro Atlanta's apartment pipeline is different from past cycles. New development increasingly targets high-end, infill locations in Perimeter Center, Lindbergh, Midtown West and Downtown East. Construction costs with no developer profit can range from $175,000 to well over $200,000 per unit and require pro forma rents of $1.40 to over $2 psf. Most involve redevelopment of former industrial facilities or functionally obsolete commercial buildings where land can make economic sense in neighborhoods that are a mix of property types and qualities. Available land in core submarkets of Buckhead and Midtown can trade in excess of $8 million-$10 million per acre, dictating high-rise, luxury condo construction rather than apartments.
In future years, in-town rental product five years old or newer should command $1,200 or more for one-bedroom units and $1,500 or more for two-bedroom units. Governmental barriers to new development in Cobb and Gwinnett join long-standing ones in Sandy Springs and North Fulton in constricting supply. The total pipeline for 2007 in Cobb, Gwinnett, Sandy Springs and North Fulton total just 930 units.
Investment Trends
Institutional and REIT capital are heavily invested in Atlanta along with hundreds of private investment groups. West Coast-based investors have become increasingly active over the last two years. They are attracted to Atlanta's growth prospects and relative asset price appeal. Transaction volume likely peaked at roughly $4 billion last year. By comparison less than $1 billion traded annually from 2001-2003.
Class A and Class B asset values have increased steadily from 2002 through mid-year 2007. Class A suburban properties averaged $99,100 per unit through August 2007, up 2 percent from the 2006 average and 16 percent from the 2005 average. Class A properties in better suburban locations trade between $110,000 to $140,000 per unit. Class B suburban properties were up 11 percent from 2006 with an average 2007 price per unit of $71,700, although Class B prices can be over $110,000 per unit for compelling locations and asset plays. Through August 2007 infill Class A properties averaged $154,700 per unit with Class B infill $87,200 per unit on average. The best-located properties can trade between $175,000-$240,000 per unit. Suburban Class C assets average $42,000 per unit, up 7 percent after a 6 percent decline from 2005 to 2006.
Rent growth, terminal cap rates, replacement costs and "price per pound" are key investor touchpoints for valuation. Core, Class A properties command FY1 cap rates about 5 percent, up slightly from mid-year '07. Class B cap rates are 5 to 6.50 percent, depending on location and merits of particular value-add strategies. Properties with weaker locations and/or inferior performance often trade on a "per pound" metric.
The mid-summer credit-crunch abruptly changed the Rolodex of active buyers. Some of the most successful acquirers of assets in Atlanta over the last few years are no longer competitive. Well-capitalized funds utilizing modest leverage (60 to 70 percent) and private equity with 1031 proceeds will be the primary buyers for the fourth quarter of 2007. Institutional investors are using capital more selectively to target the most desirable assets in terms of location, quality and perceived risk.
Forward View
Atlanta's impressive population growth of up to 150,000 people per year and expected employment gains will sustain strong upward pressure on rents. However, significant shifts in demand will concentrate on certain micro-markets and more appealing assets. Infill markets, particularly properties with interesting pedestrian neighborhoods, will capture a high percentage of the most-sought-after renters.
As much as Atlantans are embracing convenient in-town nodes, most still live in the suburbs. The northern suburbs' supply/demand fundamentals look particularly favorable, given expected growth and proven resolve to limit supply.
Malcolm McComb is vice chairman, Investment Properties|Multi-Housing Group at CB Richard Ellis Capital Markets
1 Rent and occupancy data based on input from Dale Henson and Associates
2 Haddow & Co.
To comment on this article, e-mail Teresa O'Dea Hein at thein@multi-housingnews.com
