Does the multifamily sector have multiple personalities? Real estate’s hottest property type has led to very interesting dynamics between the various asset classes, investor categories and, of course, markets.
Sometimes the tale can be two within a single city: “Atlanta is best described as bifurcated – both in terms of the local economy and the apartment market,” began MPF Research’s 1st quarter report on the Capital of the South.
Despite a troubling trough during the economic downturn, both in terms of high unemployment and excess housing, the city might be on its way again to “Hotlanta” status… and we’re not just talking about another scorching summer.
Sluggish job growth began to turn the corner in 2013, which brought the unemployment rate to 6.8 percent at year’s end, its lowest level since the recession, reported MPF. Increased employment has led to a boost in consumer confidence, which translates into more apartment renters and homebuyers. Still, Atlanta ranked fifth nationally for concentration of single-family mortgages underwater at the end of 2013.
“With so much excess housing available, multifamily occupancy has been unable to exceed 93 percent for five years,” the MPF report added.
There are several positive factors supporting a more rosy picture in the Atlanta market as spring arrived. While permitting and development activity has picked up again, the volume is still well below peak levels. Helping the already improving residential demand are the active single-family institutional investors. Add to that the long-term demand drivers, like the Millennial demographic, and one can see apartment absorption levels beginning to accelerate.
“All told, the Atlanta apartment market is beginning to show some signs of life – though not universally, with clear winners and losers among market segments,” according to MPF.
The research firm reported the following Atlanta apartment metrics: effective rent of $867 per month (reflecting rent growth of 4.3 percent for the year ending first quarter), 92.5 percent occupancy (down from 93 after fourth quarter), annual demand of 9,110 units (versus 8,622 in annual permits) and annual completions of 5,936 units. MPF stated that a “seasonally weak” 1st quarter triggered negative absorption in most areas of the city, with the top end of the market retreating in both occupancy and rents due to increased new deliveries.
Still, Atlanta very nearly cracked MPF’s top 10 list of annual rent growth leaders. As seen on the chart below, California continued its stranglehold on the list, taking the top 3 spots. Western markets claimed seven of the top 10 rent growth positions.
From coast to coast, the capital stack has been kind to multifamily investors. A big question for apartment players to economists is when will the Fed finally ease up on the pecuniary gas pedal.
Jeremiah Jarmin“Although the 10-year treasury has climbed roughly 100 basis points since last year, the federal fund rate continues to remain very low so we have not seen a spike in interest rates,” said Jeremiah Jarmin, vice president, The Apartment Group, at Bull Realty. “Very good for the market, the low cost of capital allows buyers to continue to be aggressive and, in turn, is causing prices to rise. However, the new Fed chairperson has indicated that with any signs of detrimental inflation, it will be raising rates. In anticipation of this, I would not be surprised if by the latter part of 2014 or early 2015, value-add sellers are unloading their assets purchased between 2009 and 2012 to maximize IRRs. Obviously, we’re going to be keeping a close eye on the Fed’s monetary policy this year.”
Fiscal matters are always front and center, but other shifts are not to be ignored in the apartment sector. Two PwC real estate practice leaders recently appeared on the “Commercial Real Estate Show” to discuss mega trends to look for. Urban growth (see box below), an aging population, the need for sustainability and continued technological advances all will have major effects on the multifamily industry. Savvy apartment investors and operators are preparing now so they’ll be ahead of the curve and riding those waves of change to greater returns.
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