Georgia on My Mind
The Real Estate Investor’s Ongoing Love Affair with Atlanta Housing
By Carole VanSickle Ellis
It had been more than three years since Atlanta, Georgia, had posted a double-digit temperature, but it did so this past June when the heat index hit 100. It’s also been about three years since the city’s housing market posted double-digit gains in value, but that doesn’t really worry local investors, local businesses or even local developers. Across nearly all real estate sectors, investors still believe in Atlanta.
“Unlike some other hot-but-higher-priced housing markets, there is not much evidence yet that the Atlanta housing market has overheated,” said Daren Blomquist, vice president of market economics at Auction.com. “There is evidence of a recent slowdown in the number of sales, and the rate of home price appreciation is calming down a bit, but Atlanta is performing better than the nation on both of these metrics.”
However, Blomquist and other local investors, such as Robert “RJ” Palano and Sanjay Raghavaraju, warn that a rising volume of available inventory could compel investors to accept shrinking profit margins in 2020 and beyond.
Palano serves as acquisitions director for real estate investing company Buy Cash Flow Properties. He has been acquiring properties in Atlanta for decades. He describes the market as “frothy,” although he emphasized “there are always ways to find opportunities.”
Raghavaraju, CEO and founder of 33 Holdings, a private equity real estate firm based in Atlanta and serving investors in North American and Asia, agreed. “We currently see a great deal of opportunity in value-add investments in single-family, office, retail and mixed-use asset classes,” he said, “but we are currently cautious at this point in time as e-commerce pushes these assets through a dramatic change. We want to see how we can be at the forefront of the changes as they happen.” 33 Holdings’ portfolio includes residential and commercial assets and development projects.
Atlanta appears likely to be among the final major metropolitan areas standing as the scale begins to tip from a seller’s market to a buyer’s market in primary markets around the country. Although Atlanta, like most other 24-hour cities, has seen a certain degree of stagnation in sales volume in recent months, home prices have continued to rise. In July, the Atlanta Realtors Association (ARA) reported home sales prices were up 7.3% over the same time a year prior at a median value of $295,000. July sales also held steady in volume with July 2018, although a month prior, in June, sales volume was down nearly 13% year-over-year.
The volume volatility is a result of a “mismatch between potential buyers and sellers,” ARA analysts said. They noted the prices of most homes in the area listed for sale in June were “substantially higher” than what most would-be buyers can afford. The total housing inventory in the city is just over three months’ worth, however, indicating demand is still high and the inventory is on the tight side of healthy.
Residential Affordability Is Relative
Fortunately for Atlanta-area real estate investors, the affordability factor in Atlanta is largely relative. While a median home price near $300,000 is certainly nothing to sneeze at, the cost of living in San Francisco, California, for example, is 96% higher. Brooklyn, New York, boasts a cost of living 82% higher. And, notably, those values come before considerations such as room to build (which concerns developers) the cost of acquiring land and materials for building new housing, or the cost of renovation.
Compared to other gateway cities like Chicago, Illinois, and Washington, D.C., Atlanta’s metro rents are comparable but still favorable. Average Chicago rent in April 2019 was $1,511 each month, while D.C. posted $1,773. Atlanta rents were firmly below $1,300, at $1,272. As a result, many businesses are choosing to expand into the southeast with new regional hubs, or they are transplanting existing operations to Atlanta from other, more expensive areas. This keeps demand for real estate across sectors strong, despite the rising market heat.
“As long as we stay within our operating parameters, our ‘box,’ so to speak, we are still acquiring properties, adding value, creating income-producing assets, then refinancing or reselling when the opportunity presents,” Raghavaraju said. “I doubt there is going to be a heavy slowdown in the Atlanta real estate market at this point because of how many of the fundamentals in the [national market] were corrected after the last crash.”
Georgia’s business-friendly tax environment and willingness to aggressively court major corporations for headquarters and satellite offices in the state is aided by Atlanta’s relatively affordable housing when compared to other markets of similar sizes and resources. This not only brings in new commercial development and new tenants for existing commercial buildings, it also creates an ongoing demand for new residential developments as the population continues to grow and employees follow employers to the area.
In January 2019, the state of Georgia lowered the corporate tax rate from 6% to 5.75%. It also added its own incentives to existing Opportunity Zone program incentives, offering new and existing businesses creating jobs in qualified opportunity zones (QOZs) the chance to qualify for tax credits of up to $3,500 per job. The city recently inked a deal with Starbucks to provide a $250,000 Economic Opportunity Fund grant to the company to support the creation of a new satellite office in the area.
“The entire state has a long history of policies focusing on bringing in companies to insulate and build up the economy, and Atlanta reaps the vast majority of the benefits of those policies,” said Harding Easley, an account executive with Yardi Matrix.
Easley noted that in 2019 alone, Atlanta was the recipient of 850 new jobs from Norfolk Southern (and associated new office space development), 1,000 potential “career opportunities” sourced from the BlackRock’s newest “innovation hub” (iHub) and 600 new jobs from Salesforce, which is already invested in the city and will take over the remainder of its existing building, renaming it Salesforce Tower Atlanta. Additionally, Pullman Yard Development predicts its 27-acre, $100 million mixed-use “creative city” project will be complete in 2020. It is dedicated to serving Atlanta’s already $9 billion film industry.
Many of these incoming corporations will require a substantial population of highly educated employees in order to support the demands of the new headquarters, hubs and satellite offices.
“Can Atlanta’s professional population meet that demand?” Easley asked. “I would say probably so. Nearly half (49%) of the city’s population has a bachelor’s degree or higher, and that number seems likely to rise given the massive incentives in the form of public-private partnerships between local universities, the city government and private developers.”
Chasing Down Deals All Over the City
When it comes to the types of deals on the minds of Georgia investors, the best answer is simply, “all of them.” Long a subject of urban design ridicule for its notorious urban sprawl and nightmarish rush-hour congestion, Atlanta and its surrounding suburbs are having the last laugh as other cities find themselves with limited space for expansion, skyrocketing housing costs and traffic as bad or worse than that for which the city is known.
“Atlanta has big pockets of growth all over the metro area and the suburbs around the city. In those places, everything is wide open when it comes to investment potential,” Raghavaraju said. “If you know the right assets (for you) to bank on, then you can find them in Atlanta and really go for it.”
“I’m still a firm believer in single-family houses, and there are still plenty of opportunities in Atlanta in that sector,” Palano said. “They are the most liquid of all real estate investments for U.S. and international investors. There may not be as much inventory as we used to see, partly because the hedge funds active in the area are actually selling mainly to each other at this point, but there are plenty of individual deals out there where the owners are selling because of a death, a divorce, the traditional reasons. . . .
“We still buy at auctions, but where there used to be 1,000 houses, now there might be 50.”
Blomquist provided hard data to back that up as well, describing a “red-hot demand for distressed properties” that caused average sales prices at auction to hit all-time highs of more than $150,000 in June of this year.
“The city is living up to its ‘Hotlanta’ moniker when it comes to the housing market,” Blomquist concluded. “Real estate investors love Atlanta.”
As long as investors, businesses and the incoming population continue to feel that way, any housing downtrend in Atlanta could trail a national slowdown by months or even years. n
Sidebar:
Atlanta’s “Nodes” of Intellectual Capital
One of the things that makes Atlanta particularly attractive to businesses looking to expand their corporate footprint in the southeast is, naturally, the proximity of the world’s busiest passenger airport to the city center. Hartsfield-Jackson Atlanta International Airport has maintained its status as the busiest airport by passenger traffic for more than 20 years, and it employs more than 55,000 residents with a payroll of $2.4 billion.
In fact, some local analysts credit a Delta hiring spree with the salvage of one nearby county’s housing market in the wake of a public education scandal that resulted in a now-rectified loss of accreditation in that county’s schools. That series of hiring waves brought a number of new, skilled professional residents into an area that otherwise would not likely have attracted those individuals as homeowners or renters. However, the airport is one of more than half a dozen of what Yardi Matrix refers to as “Intellectual Capital Nodes” in Atlanta.
Other notable “nodes” include:
- The Atlanta Metro Area, which saw 38% multifamily rent growth last year, 11% supply growth and just 0.6% occupancy change. This area boasts more than 209 million square feet of office space.
- Vinings, which posted 34% rent growth in the last year, 13% supply growth and an 0.3% occupancy change.
- Midtown, which boasted 35% rent growth, 38% supply growth and a 1% occupancy change.
- Sandy Springs, which had a 22% rise in rents last year, an 8% supply growth and -0.6% occupancy change.
- Alpharetta, which posted 37% rent growth, 12% supply growth and nearly -2% occupancy change.
- Buckhead, home of the new Salesforce Tower, which also experienced subzero occupancy changes but 25% rent growth and 39% supply growth.
