By Keith Loria, Contributing Editor
There’s no denying that the Southeast has a certain appeal: the weather is nice, beaches and outdoor amenities are nearby, and many companies and industries are opening up shop. It’s no wonder that the multifamily market has seen an increase over the past year, with some areas seeing rent growths as high as pre-recession numbers.
Young people today want to live closer to urban amenities and to each other, and can only afford to rent in such locations. Additionally, a stricter credit environment, memory of the housing crash, and the higher cost of owning a home relative to renting has led many millennials to seek rental housing over the purchase of a home.
“When you look at echo boomers, there are 4 million more coming out of the recession, so there’s a fundamental population growth in metros,” says Jeff Myers, real estate economist for the CoStar Group, Washington, D.C. “The active home ownership rate in the Southeast is declining and multifamily is very strong in almost all key areas.”
Blake Okland, principal at Apartment Realty Advisors, Charlotte N.C., says the Southeast has experienced very good job growth, healthy development and a healthy rental environment. “Some submarkets are getting in peak deliveries of supply, which are getting absorbed and staying stable and strong,” he says. “As a consequence, so is the investment activity.”
Okland compares secondary markets such as Charlotte, N.C., Raleigh, N.C., and Nashville, Tenn., to multifamily hotspot Austin, Texas, due to their high job growth with “new economy” type jobs.
The industries driving the Southeast include medical, medical research, pharmaceutical, IT, financial services and energy. Many millennials are heading there for that reason and for those industries.
“It’s a demographic with a high propensity to rent and a discretionary income heavily allocated to lifestyle,” Okland says. “As a consequence, a lot of the urban infill walkable type communities are being delivered and absorbed. You look at the markets getting the greatest amount of supply in general, and the reason supply is coming is there’s a demand.”
Neil Brown, chief executive officer and founder of ArchCo Residential and former chief development officer of Archstone, says based on rent growth, numerous markets in the Southeast have performed well during the most recent quarter and over the past year.
“Atlanta is among the top markets in the nation for both quarterly and year-over-year rent growth,” he says. “Miami, Fort Lauderdale (Fla.), Charlotte (N.C.), Nashville (Tenn.) and West Palm Beach (Fla.) are also among the top 15 markets, posting annual rent growth greater than 4 percent.”
With average apartment occupancy above 95 percent, the markets of Miami, Nashville, Fort Lauderdale and West Palm Beach continue to absorb the new units delivered to the market.
Myers says the Florida markets are outperforming other markets in the Southeast with Miami, Ft. Lauderdale and Tampa all very strong with low vacancy rates and high rent growth.
“Even [in] a market like Orlando, where tourism has fully recovered, there’s a lot of growth and traffic because they have jobs there,” he says. “The type of jobs that fuel their industry are jobs [whose employees] are more likely to be in apartments.”
He notes that in Atlanta, the economy hasn’t healed as fast but the market is still doing fine because a number of white-collar jobs are opening up. Jacksonville, Fla. meanwhile is a bit slower performing.
No shortage of new development
According to Brown, Nashville has been receiving a significant amount of new construction, yet has held up well as occupancy in Nashville remains above 96 percent, placing it among the top in the nation. Miami is also seeing a boom in new construction, with both condos and apartments being produced at a rapid pace. Ft. Lauderdale is also experiencing a surge in new development.
“Permits are just getting back to historical norms,” he says. “Although permits have increased significantly in some markets, we are just now getting back to the longer-term average annual production of apartments.”
When it comes to new construction, Myers says walkability has been top of mind for many developers in the Southeast. “If you are looking at where new development is taking place, developers are really tending to sink in on downtown with walkable locations more than they have in the past,” he says. “Most of Atlanta has been in midtown or Buckhead, where there are high-end jobs. Charlotte is all about uptown and downtown, following the new train lines going in there. It’s all about the live/work/play experience.”
Not to say that suburban locations aren’t getting their fair share of new construction. Orlando, Charlotte and Raleigh are cities that have seen a boon in 2014. For projects that were stalled in the downtown, Brown says most, if not all, have either been completed by the original developer, or the site was sold to someone else who is now finishing the project.
Household formation, which was deferred because of the Great Recession, is increasing among primary age groups that rent apartments. “For example, the percentage of the 18-24 year-old group that was living at home a year ago has decreased from 56 percent to 55 percent,” Brown says. “Although that percentage decline seems small, it represents approximately 300,000 young people moving out of their parents’ homes.”
Job growth is another big factor in the rise of the multifamily market. “If you forget about the unemployment rate for a minute and simply look at the number of people in the labor market, compared to 2013, there are 2.3 million more people working now than one year ago,” Brown says. “And 4.5 million more people working than two years ago.”
Quality assets are catching really high prices and chances are, if a multifamily property was on the market in the last couple of years, it fetched a price close to the near-record pricing of the beginning of the millennium. Okland says there’s certainly a lot of desire in the investment community to pursue urban infill lifestyle communities with proximity to employment, entertainment districts and retail—especially with high-end developments.
“The investment appetite for urban infill in gateway cities is seeing plenty of activity,” he explains. “Value-add space is also really robust. It’s firing on all cylinders.”
Brown says investor interest in Southeast markets remains strong as cap rates are below historical norms. These cap rates may continue for a period of time, particularly if the economy continues to recover at its very tepid pace.
However, with construction ramping up in places like Nashville, Orlando and Raleigh, which Myers says are some of the most aggressive building markets in the country, the new construction will lead to higher vacancies, so that could affect rent growth, and investors may not see as much growth in the near term as these new properties come on line.
“The theme out there in ’14 and ’15 is that you will see the whites in the eyes of the market’s ability to absorb this stuff because generally, this is a peak delivery season from second quarter ’14 to first quarter ’15, and it’s holding steady so far,” Okland says. “The thesis coming out of downtown was that urban infill came out of the ground first and at cost levels that made them work. The cost structure is no longer there, so the trick is repeating that.”