If the Southeast U.S. were a country, it would have the fifth-highest gross domestic product (GDP) in the world. A significant portion of that figure is produced by the massive economic engine of the Atlanta metro area. Atlanta not only has the 10th-largest GDP of any U.S. city, it’s also among the fastest growing and has become a pivotal logistical global hub.
At 5.275 million, the metro’s population is the nation’s fifth largest, with a strategic location providing accessibility to 80 percent of the U.S. population within a two-hour flight. Its competitive advantage as an important global distribution hub is bolstered by its proximity to the Port of Savannah, one of three major Southeastern ports that will capture redirected shipping, made possible by the transpacific 2014 Panama Canal expansion project.
With its diverse economic underpinning, Atlanta offers one of the nation’s most dynamic business climates. Notable rankings include being home to the world’s busiest passenger airport and the largest industrial market in the Southeast. Relative to the nation, Atlanta ranks first in health care IT, third in Fortune 500–headquartered firms, fifth in transportation/logistics employment, seventh in the number of bioscience companies, and 10th in high-tech employment. By all accounts, Atlanta is an economic heavyweight.
Back on the Radar
Atlanta’s lagging economic recovery is often cited by many in the media. In reality, however, the metro began showing improvement in early 2011.
What was previously calculated by the Bureau of Labor Statistics as a 30,000-projected job loss in 2011 in fact became a 30,000-net job gain. In terms of 2011 job growth, Atlanta ranked second, only behind Houston, with a 3.1 percent increase, nearly double the nation’s 1.6 percent rate. This announcement put Atlanta back on institutional investors’ radar after a four-year hiatus.
Other important fundamentals have improved as well. From the 2010 trough through the 2011 recovery, Atlanta’s average occupancy improved 400 basis points (bps). Class AA/A owners indicated very healthy effective-rent gains of between 6 percent and 8 percent. An analysis of our own recent Class AA sales (Post Biltmore, Axis at Perimeter, and Westchester at Peachtree Valley) shows an even more pronounced rent lift of between 8 percent and 14 percent.
Industry speculation about occupancy and rent improvement had been attributable to the usual suspects: The Gen Y cohort now entering the rental pool at a rate of 4 million a year; the decline in homeownership; and anemic multifamily starts and completions for the prior four years. However, another dynamic went unnoticed. A look at job data shows that while the overall job picture appeared stagnant, jobs were actually being added to the demographic most likely to rent: those ages 18 to 34, the majority of the Gen Y group.
This factor explains why Atlanta’s recent rent gains have been so drastic. Atlanta has a young population. This is not only showcased in the city’s No. 6 national ranking for college-graduate relocation, but is supported by a significant demographic characteristic: Atlanta’s composition of Gen Y residents exceeds that of the nation by 300 bps, and its composition of Gen X (ages 35 to 49) residents is 500 bps higher than the nation’s.
Although effective-rent growth has been robust for some in Atlanta, that growth has not been evenly dispersed.
The Class AA segment has seen a rent rebound mostly in the double figures, but suburban Class A has improved at a more subtle 4 percent to 6 percent, and Class B is just beginning to see trickle-down influences between 3 percent and 5 percent. Class C, meanwhile, has remained essentially flat. This is about to change, however.
Enabled by long-standing concessions in the Class A arena, Class B renters have filtered into Class A assets over the years, and Class C renters have entered the B space. The typical Atlanta A renter has now endured two hefty renewal increases from the 2010 bottom. As a result, many in that renter segment now find Class A rents unaffordable and are being forced back into Class B properties. This dynamic has begun to strengthen B occupancies and will result in pronounced rent gains within the year. Accustomed now to the luxury space, but forced back into a value segment, this B renter may now be ready for value-add upgrades.
Effective-rent growth is helping spur Atlanta’s transaction volumes, too. Volumes are back to 2004 levels and are largely represented by pent-up transaction supply created by the recession. This volume growth is being facilitated by not only robust effective-rent growth but low interest rates, as well.
Historically low interest rates have enabled historically low cap rates; generally, cap rates for urban infill Class AA are in the low–4 percent range, while cap rates for well-located suburban Class A assets are 5.5 percent and, for well-located Class B, 6 percent. The confluence of the lower capital cost and higher growth projections have provided sellers a window of opportunity to capture returns not seen in more than a decade.
Multifamily Proves a Better Risk
Dictated by a decade’s worth of stock volatility and anemic bond yields, multifamily has emerged as a better risk-adjusted yield alternative. Buyers today are capturing the best cap-rate-to-cost-of-debt margin available in the past decade. On the risk side, whereas most of the total returns were back-loaded for deals bought in 2005 through 2007, today’s total returns are more front-end–oriented.
Indeed, if today’s apartment dynamics mimic those of the 1990s, Atlanta rents are poised for a very solid rebound.
In further good news, new development has begun in the metro but is on a very tight leash. Sensible developments are being proposed and started, mostly in urban infill areas. Daniel Corp. and Novare have commenced high-rise developments within Midtown, for example. Most mid-rise product, meanwhile, is being proposed or started in leading urban infill locations in Perimeter Center, Buckhead, and Midtown, exactly where today’s renter demand is.
Overall, Atlanta reports good tidings for apartment owners. In addition to strong fundamentals, smart development and capital restraint are limiting supply. At the macroeconomic level, Atlanta will distinguish itself in the years ahead as a global influencer in world trade, transportation, and distribution.