Atlanta Apartment Construction Hits New Record Amid Signs Of Slowdown

Headwinds for commercial real estate are building, from recent spikes in interest rates to slowing rent growth and concerns about an economic recession. Just don't tell that to apartment builders in Atlanta.

Developers are underway with 32,960 new, market-rate apartments in Metro Atlanta, a new record for the region, according to data from RealPage. The pipeline swelled 8.5% over the first quarter, which was the previous high-water mark with 30,363 units under construction, according to RealPage, which has tracked apartment fundamentals in Atlanta since 1993, but doesn't count designated affordable units.

Some 30% of all construction permits filed in Metro Atlanta were for new apartment projects, RealPage Director of Research and Analysis Carl Whitaker told Bisnow, as developers try to catch up with demand for housing in the region as rents continue to rise and occupancy remains extremely tight.

“Multifamily has been a really good hedge against inflation,” Whitaker said.

Midtown remains the most active market in the region for apartment development, with more than 4,900 new units under way as of the second quarter, according to RealPage. But developers have been active in suburban Atlanta as well, with 2,800 new units underway in West Atlanta, more than 2,100 units in the northeast portion of Gwinnett County, 1,425 units in Henry County and more than 1,200 units underway in Kennesaw and Acworth.

Some experts believe this growth is close to its peak, and due for a slowdown. Rises in the interest rate have made borrowing costs for developers more expensive, while the cost of construction is projected to rise 14.7% this year over last year, a record increase since CBRE began tracking material, labor and supply chain costs in 2007.

Developers have been able to pass those costs along with higher rents, but there are signs they are hitting their limits.

“The returns that people are willing to take … have become squeezed. But people can still make deals work,” said Nathan Kaplan, the managing director with Kaplan Residential, which delivered the 17-story Generation Atlanta apartments in Downtown last year and is underway with another Generation-branded product in Avondale Estates.

Even though most apartment landlords no longer expect the steep climb in rents moving forward, Kaplan Managing Director Scott Hawley said everyone expects them to continue to grow.

“Look, it'll be perfectly good growth where everybody will be happy at the exit. But it's not going to be 25% growth year-over-year,” Hawley said.

Between 2012 and 2021, developers were building on average more than 13,700 new units per quarter throughout Metro Atlanta, according to data compiled by Lee & Associates, less than half the current pipeline.

Some experts are sounding alarms. For the first time since 2020, a dozen U.S. apartment markets saw a drop in asking rents, according to Apartments.com, including in once hot Sun Belt markets Miami, Phoenix and Dallas-Fort Worth.

"The deteriorating rent situation highlights a significant collapse of demand in the sector when new unit deliveries are projected to hit 230,000 in the second half of 2022,” Jay Lybik, national director of multifamily analytics at CoStar Group, said in a statement earlier this month.

But, in Metro Atlanta, apartment fundamentals have defied the odds. Rents in the second quarter reached $1,637 per unit, a 10% increase over the past 12 months, according to Lee & Associates. And despite rising rents and new apartment deliveries, average occupancy rose to more than 95% in February compared to a year earlier, according to Multi-Housing News.

Metro Atlanta has continued to gain population, which is adding to housing demand. As of April, the 11-county Metro Atlanta region gained nearly 65,000 new residents, a 1.3% increase from a year earlier, pushing the entire region's population to 5.1 million people, according to the Atlanta Regional Commission. Some of the strongest population growth was experienced in the suburbs, such as Gwinnett, Cobb, Cherokee, Henry and Forsyth counties.

"We are clearly recovering from the initial shock of the pandemic in 2020," ARC Executive Director Anna Roach said in a press release.

Continued fundamental strength is encouraging both developers to add new supply and investors to buy up that supply, said Norman Radow, the CEO of The RADCO Cos.

“Rents are going up everywhere,” Radow said. "All the properties we still own, no matter where they are, they're still going up and going up to record levels."

More than $20B was spent on Atlanta-area apartments in the 12 months ending in June, averaging $215K per unit with a capitalization rate of 4.4%, according to Lee & Associates — all around record levels. Investor appetite has encouraged RADCO to sell a lot of its apartment portfolio and invest in other asset classes, including hotels.

“If someone is willing to pay me for perfection, let's sell and we'll come back in when the market stabilizes,” Radow said.

But Radow said there has been recent a drop-off among institutional investors in Metro Atlanta, which is providing an opportunity for his firm to buy high-rise apartments that would have been out of his price range last year. For instance, in February, RADCO purchased The M by Radius, a 23-story luxury apartment tower in Midtown, for $131M. Radow said his firm is under contract to buy another core apartment asset in Atlanta.

Kaplan expects demand for apartments to remain strong in the coming years due to sheer population growth and the fact that attainable for-sale housing is still in short supply, Hawley said.

Plus, Atlanta has a factor that could give it a leg up over its pandemic growth peers in Arizona and Texas, he added.

“We got water in the Southeast. That's major. I am 100% convinced that the Southeast will grow exponentially over the [other] Sun Belt [markets] because we have water,” he said. “I really think that will become, over the next three to five years, a major decision for corporations.”