Mobile, Ala.—While New Orleans languishes, Mobile thrives. This coastal Alabama market about 140 miles east of the Big Easy, which saw entire neighborhoods destroyed by Hurricane Katrina in 2005, only suffered a glancing blow from the storm.
Although Mobile’s downtown was flooded, and homes, apartments, and businesses along the coastline were destroyed, the damage here was much less severe than the devastation the storm wrought in Mississippi and Louisiana.
Less than two years later, the city’s economy is booming, unemployment has fallen to its lowest level—2.8 percent—since the federal government started compiling that data in 1990, and more expansion is on the horizon. What that means for apartment operators is that good times are ahead.
“For the first time in a long time, things are looking better,” said Chuck Stefan, senior executive vice president for apartment development at The Mitchell Co., a multifamily, single-family, and commercial real estate owner and developer based in Mobile. “Before hurricanes Ivan and Katrina we actually had a soft market; we had some complexes on the east shore of Mobile Bay, in Baldwin County, which never got over 80 percent occupancy.”
The storms drove thousands of people to Mobile, filling up homes and apartments, he said. “We were one of the few beneficiaries of Hurricane Katrina.”
A recent survey by Rock Apartment Advisors, Alabama’s largest multifamily broker, echoes that view of Mobile. “That market in terms of apartment fundamentals as it relates to job growth, household formation, and spilling into occupancy and rent growth, has the best fundamentals of any of the markets in Alabama,” said Ryan Griffin, a sales adviser at the company.
Double-digit rent growth
In the 12 months after Katrina hit the Gulf Coast, rent growth in the area hit double digits even as occupancy rates rose to near 100 percent, he said. Over the past year, rent growth has slowed to between 3 percent and 5 percent, but it’s expected to pick back up to between 4 percent and 5 percent over the next two years or so, Griffin added.
That’s partly due to a surge in jobs projected over the next few years as several major employers expand or open facilities in the metro area. A $624 million NASCAR racetrack is planned for completion in 2009 in northern Mobile County, not far from where industrial giant Thyssen Krupp AG plans to build a $3.7 billion steel mill. The German company has said construction of the plant will create more than 29,000 jobs, and once the facility opens for production, it will create about 2,700 permanent jobs.
Two employees of the company have already rented units at the Legacy Oaks at Spring Hill, a 112-unit luxury apartment complex that The Mitchell Co. opened last year, Stefan said. Rents for two-bedroom units at the upscale complex start at $1,100, and three-bedroom apartments lease for $1,650 a month.
Effective rents in Mobile averaged $624 in the first quarter of 2007, up from $611 a year earlier and $553 in the first three months of 2005, according to data from Axiometrics, Inc., a Dallas-based apartment research firm. Over that same period, the occupancy rate rose from 94 percent to 98 percent and concessions disappeared, the company’s data showed.
The Legacy Oaks is the first new apartment development to be built in Mobile County since 2002, according to Griffin of Rock Apartment Advisors. At least three or four other properties are in the pipeline in Mobile County, including a 400-unit mixed-use complex planned for west Mobile, he said. In addition, Colonial Properties is developing a 324-unit Class A property in Baldwin County, to Mobile’s east.
On top of the market-rate development, the federal government’s Gulf Opportunity Zone incentives through the low-income housing tax credit program are spurring more affordable housing in the Mobile area.
Affordable housing pipeline grows
“There are reports coming out of Baldwin County that retail growth is really constrained by the amount of workers they have, so there’s a real push for affordable housing there,” said Griffin. “They’re having to bus people in from Mississippi just to open fast food restaurants and retail stores.”
In 2006, the Alabama Housing Finance Authority reserved tax credits for 19 new construction projects totaling a combined 1,291 units in Mobile and Baldwin counties, according to administrator Haywood Sport. In June, the agency reserved credits expected to create or renovate another 252 units in the area.
With the economy looking so strong, transaction volume is picking up, and the area is generating increased interest from institutional investors and operators, said Griffin. Last year, Rock Apartment Advisors brokered the sale of Arlington Park, a 252-unit complex that sold for $22.4 million, or $89,000 per unit. “That really set the high mark for the market,” he said.
The company recently took a 320-unit property out to market and received 14 offers, three for more than the asking price, according to Griffin. That development will probably end up trading at about a 6.5 percent cap rate, when insurance costs that run about $1,000 per unit are factored in, he said.
“We’re starting to see insurance stabilize, and that will help the transaction market,” said Griffin, who expects costs to come down from between $1,000 and $1,500 per unit to about $600 or so. “That will allow people to be a little more aggressive on their pricing,” he said.