Metro rents rise amid apartment boom

Occupancy rate: 94.5 percent

Source: Axiometrics

The first of the month for many in metro Atlanta is getting pretty expensive.

Apartment rents in the region continue to climb — up about 7 percent in April compared to the same month a year ago — and vacancies are tightening even as developers bring thousands of new units to market.

One survey by Dallas-based Axiometrics listed the average metro Atlanta rent at nearly $1,000 per month for a two-bedroom unit, and apartment vacancy at its lowest point since 2001. Apartment List breaks down the averages to $1,290 for a two-bedroom in Atlanta, $1,350 in Dunwoody and $990 in Duluth.

The trend comes as homeownership rates drop in the wake of the housing bust. Many young adults either can’t afford a home or don’t want the risk and hassle of owning one, which has led to more demand for rentals.

But the resulting rise in rents is squeezing renters’ budgets and giving some analysts pause about affordability. It’s an issue in many major U.S. and international cities.

“Clearly some people are stretching to rent in urban intown areas,” said Phil Tague, president of Atlanta apartment developer and manager AMLI Residential. He said the percentage of income renters pay is higher than he’s seen in his career — though still within the credit metrics his company uses to qualify tenants.

Apartments were among the early development bright spots during the slow recovery from the recession. Construction of new projects has continued to hum along as increased rental rates lured developers into the market and prompted investors to buy existing complexes.

Millennials delayed starting families and put off buying homes; many consumers continue to lack cash for a down payment on a house or have credit ratings that are still shot.

Still others don’t want to own a home, either to have the freedom to uproot for work or from having witnessed the collateral damage of a financial crisis that wiped away equity and led to a raft of foreclosures.

“Some folks are in the rental market because they don’t have a choice,” said Eugene James, regional director for Metrostudy, a housing information and analysis firm.

The surge in rents comes as more developers pitch new high- and mid-rise communities, particularly in the city of Atlanta and inner suburbs.

Nearly 41,000 units are in some stage of the development pipeline across 13 metro counties, including Clayton, Cobb, DeKalb, Fulton and Gwinnett, according to research firm Databank Atlanta.

About half are slated for the city of Atlanta.

Thousands of new units

Many of those units are in the early planning stages and may not be built, but it’s still a staggering number, Databank CEO Alan Wexler said.

According to Axiometrics, more than 4,400 units opened in the past six months, and nearly 5,700 more will be ready for occupancy by the end of 2015.

“Yet, occupancy is at a 14-year high and Atlanta is among the top 10 metros in the nation for rent growth,” Stephanie McCleskey, Axiometrics vice president of research, said in a recent report.

Tague, of AMLI, said the growth in rental rates will taper off and the margins will get thinner for developers. But the popularity of in-town living will remain.

Jim Borders, whose company Novare Group is the developer behind the SkyHouse towers in Buckhead and Midtown, said demand remains strong and the region isn’t overbuilding yet.

A normal rate of development is about 2 percent to 3 percent of total units in the market, which Borders said is about 9,000 to 13,000 new apartments in a year. Metro Atlanta is still within that range.

“There’s a continuing desire by millennials to live in an urban setting, not just in Atlanta but across the United States,” Borders said after the ground breaking a few months ago for the Atlantic House tower in Midtown at West Peachtree and 14th streets.

“There’s also not a very high amount of development happening in the suburbs,” he said. “We feel good from where we are in a supply and demand standpoint.”

Day of reckoning?

Wexler, from Databank, worries that a day of reckoning is coming in development. He’s just not sure when.

Affordability is beginning to become a problem, Wexler said, and though older units are the more affordable option, even those units are seeing price increases.

“They just don’t build old apartments,” he said.

Databank lists the average rent in the 13-county area as $858 per month for a two-bedroom unit, but their data covers a broader swath of properties, including many older and smaller communities.

Land prices in desireable neighborhoods such as Midtown, Buckhead and Brookhaven and along the eastern end of the Beltline are spiking, making it more costly to build — a cost passed along to renters or evened out by building more units that are smaller.

The cost to develop new apartment towers and complexes also is rising. Material costs haven’t spiked, but labor costs have as subcontractors are spread thin among projects, said Stuart Bruening, a vice president over office, multi-family, hospitality and student housing with general contractor JE Dunn Construction.

JE Dunn, which is building high-rise and mid-rise projects for developers around Atlanta, is turning work away because of heavy demand, Bruening said.

Investors hungry for returns on their money are pushing sale prices of existing complexes ever higher, Wexler said, which also increases the rents needed for new owners to make a return on their money.

Weaker growth coming

Eventually the growth in rents will flatten or weaken as development outstrips demand, Wexler said. But he’s not sure when metro Atlanta will reach that point.

Many of the fundamentals behind the boom remain.

For several years, metro Atlanta’s job growth trailed the national average, but that changed as the region added about 84,000 jobs in the past 12 months ended in April.

Though more are employed, the housing market remains fickle. The supply of homes for purchase is about three months — the historical average is about six months — and though prices are rebounding many would-be buyers still aren’t in financial shape to purchase, said Metrostudy’s James.

One potential path for many apartment projects if things get too hot is to convert units to condominiums. Units in the higher-end projects are being built with granite counter tops and upgraded cabinets and finishes, similar to what one would find in a condo.

But how deep that market might be to buy condos, if metro Atlanta gets there, isn’t clear, Wexler said.