Top 5 Trends Shaping Atlanta's Multi-family Market

  1. Positive Absorption Amid Challenges: In 23Q2, Atlanta’s multifamily market saw its strongest positive absorption in nearly two years, primarily in high-end properties. However, absorption in low-to-moderate income properties remained negative due to inflationary pressures impacting household formation among cost-constrained groups.
  2. Increasing Vacancy Rates Despite Demand: Even with increased leasing activity, vacancy rates in high-end properties continued to rise, influenced by record levels of new constructions. Over three-quarters of the 33,000 units under construction are 4 & 5 Star properties, adding significant competition and driving rents down, particularly in urban areas like Midtown.
  3. Performance of Lower Tier Properties: Owner/operators of 1&2 Star properties in Atlanta have experienced positive gains despite the broader market’s challenges. Limited new supply in this segment has helped maintain relatively low vacancy rates.
  4. Investment Activity and Market Cooling: Atlanta remains a top market for multifamily investments, though total sales volume has dropped significantly due to rising interest rates affecting the lending landscape. Transaction activity in the first half of 2023 was down by over 80% compared to the previous year.
  5. Long-term Investor Confidence and Cap Rate Adjustments: Despite current market slowdowns, major institutional investors are still optimistic about Atlanta’s population and job growth potential, which supports multifamily demand. Transaction cap rates have increased by about 150 basis points as investors look for better yields, but high-quality deals in premium submarkets are still closing.

    Rising Vacancies Amid Construction Boom

    The vacancy rate in Atlanta’s multifamily market has climbed from near-record lows to 10.9% as new constructions increase, according to CoStar.

    Just two years ago, vacancies were around 5%, but with 33,000 units currently under construction—a 6.6% expansion of inventory—vacancies are expected to rise further. This surge in new units will likely suppress potential rent increases in the coming quarters due to heightened competition.

    Diverging Absorption Trends Across Property Tiers

    The absorption slowdown in Atlanta has been stark, especially in lower-tier properties.

    While luxury properties (4 & 5 Star) have added over 6,500 units, lower-tier properties (1 & 2 Star and 3 Star) have experienced significant declines, with negative absorption totaling over 4,600 units. This trend suggests that economic pressures, like rising living costs, impact household formation among more cost-sensitive renters.

    Resilience of Atlanta’s Multifamily Market

    Despite current challenges, Atlanta remains a leading market for population growth and multifamily demand.

    Atlanta continues to attract residents due to its reputation as a top destination for net domestic migration. The region’s population has increased by over 900,000 since 2010, fueling consistent demand for housing and positioning the city well for long-term investment in the multifamily sector.

    Attraction of Educated Workforce in Core Submarkets

    Atlanta’s urban and core suburban areas thrive due to a growing base of highly educated workers, especially in tech.

    Despite potential slowdowns due to tech sector layoffs, Atlanta’s educational institutions produce over 40,000 graduates annually, attracting a skilled workforce seeking opportunities in a relatively affordable metro. This educated demographic supports the demand for high-quality rental properties in strategic submarkets.

    Stability in Workforce Housing Amid Industrial Growth

    Atlanta’s blue-collar workforce underpins stability in specific multifamily submarkets.

    With robust industrial employment, regions like Douglas County and Outlying Gwinnett see sustained demand for workforce housing. The lack of new construction in these segments ensures higher occupancy rates compared to the broader market, showcasing the resilience of these areas amidst broader market fluctuations.

    Modest Outlook Due to Rising Vacancies and Development Surge

    Atlanta’s multifamily market dynamics are shifting due to slowing rent gains alongside rising vacancies.

    With a significant pipeline of developments, the next few quarters will likely see only modest rent gains. This trend corresponds with weaker net absorption rates impacting the market’s strength and growth potential.

    High-End Market Faces Stagnation

    Luxury properties in Atlanta are experiencing a notable slowdown in rent increases.

    Rents in 4 & 5 Star properties have decreased by 3.2% year-over-year, contrasting the over 15% growth in 2021. This cohort faces increased competition from new developments, which is likely to continue affecting rent growth. Meanwhile, 3 Star properties also saw declines, but 1 & 2 Star properties have increased by 2.5% due to limited supply and fewer new developments.

    Resilience in Peripheral Submarkets

    Some suburban areas around Atlanta continue to show resilience in rent growth despite broader market trends.

    Southeast DeKalb County, for example, has managed to maintain stable rents despite flattening absorption rates. The area offers more affordable rental options, with monthly rents hovering around $1,300 and slightly positive growth. This is helped by limited new supply and some refurbishment of existing properties, keeping the market relatively stable compared to more central areas.

    Gradual Growth in Less Central Areas

    Outer submarkets like Westside Atlanta also demonstrate modest rent growth amid broader market challenges.

    In Westside Atlanta, where average rents are below $1,300 per month, there has been a consistent 1% rent growth over the past year. These less central areas benefit from a combination of affordability, less intense competition from new developments, and ongoing demand supporting slight rent increases.

    Continued High Levels of Apartment Construction

    Despite a recent slowdown, Atlanta’s construction pipeline for new apartments remains substantial.

    New construction starts have dipped, yet Atlanta maintains a near-record level of ongoing projects, with 33,000 units currently under development. This represents a 6.6% expansion of the existing market-rate inventory. Most of these units are in the high-end 4 & 5 Star categories, predicting continued supply-side pressure, especially in the luxury segment.

    Suburban Expansion Driving Construction

    Suburban submarkets are seeing increased construction activity, with significant growth in areas like Gwinnett County.

    Gwinnett County, particularly its outlying areas, is experiencing a boom in new construction due to its availability of land, affordability, and vital employment sectors. Around 3,000 units are under construction in Outlying Gwinnett, set to expand the existing inventory by an additional 8%. This suburban growth is supported by good schools and solid household income growth, making it an attractive option for many.

    Core Submarkets Remain Active

    Atlanta’s core areas continue to see a flurry of development activity, keeping them at the forefront of the housing supply.

    Major in-town submarkets such as Midtown, Buckhead, West Midtown, and Eastside remain among the most active in terms of new supply. These areas, along with new hotspots like Eastside Atlanta and South Atlanta, are experiencing significant construction, including projects along the South Side BeltLine trail and in the Summerhill neighborhood. This ongoing development underscores the persistent demand for housing in Atlanta’s core areas.

    Diminished Investment Activity Amid Economic Shifts

    Investor engagement in Atlanta’s multifamily market has slowed, influenced by rising economic challenges.

    While multifamily investors remain active in the Atlanta metro, there’s been a significant contraction in transaction volumes in 2023, with about $1.3 billion in multifamily transactions closed compared to nearly $9 billion in the first half of the previous year. The combination of record-high pricing, rising interest rates, stricter lending criteria, and slower rent growth is reducing the velocity of transactions. Cap rates have increased to 5.6% from 4.1%, reflecting these tighter conditions.

    National Firms Dominate Atlanta’s Investment Landscape

    Out-of-state investors, primarily national firms, continue to shape Atlanta’s real estate investment scene.

    These investors make up approximately 85% of the transaction volume over the past year, focusing on acquiring top-tier properties even amidst declining rent gains in upscale submarkets. For instance, Blackstone’s recent acquisition of the Ellington Midtown for $133 million underscores the continued confidence in Atlanta’s market, bolstered by significant corporate commitments like Microsoft’s expansion at Atlantic Station.

    Long-term Growth Attracts Investors

    Atlanta’s real estate market has shown significant long-term price appreciation, attracting sustained investor interest.

    Over the last five years, market prices per unit have surged by over 70%, from $150,000 to $220,000, illustrating long-term solid value growth. Even properties purchased at peak market prices have shown profits upon resale, such as Birge and Held Asset Management’s sale of Ashford in Brookhaven, which fetched nearly 20% more than its purchase price. Despite current headwinds, Atlanta’s historical performance continues to draw investor attention.

    Future Outlook on Investment and Market Adjustments

    Atlanta’s real estate market faces adjustments as it navigates an influx of supply and evolving economic conditions.

    As the market absorbs a record level of new supply and contends with increasing vacancy rates, price growth may slow or reverse. This will likely impact sales prices and moderate the pace of transactions in the coming periods. Investors must recalibrate their expectations and strategies to adapt to these emerging challenges in Atlanta’s multifamily market.

    Closing Thoughts

    In summary, Atlanta’s multifamily market faces economic challenges while retaining long-term solid growth prospects. Investors should navigate these changes with strategic insight. As market conditions evolve, leveraging professional expertise becomes crucial. For expert guidance on your investment strategy, contact Lumicre.

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