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Synchronicity & Divergence in the Southeast

By Kristina Garcia, Research Manager

Multifamily properties throughout the nine-state Southeast region continue to attract investors of all kinds in 2018, as the sector maintains its advantage in terms of return on investment based upon solid fundamentals. As of Q2 2018, U.S. average multifamily effective rents rose by 3.6% year-over-year to $1,326, a new record according to AXIOMetrics.

Marc Robinson

Jimmy Adams

This overall trend has contributed to the Southeast multifamily market keeping up with 2017 multifamily transaction volume year-to-date, which totals more than $21 billion in 2018 through the end of August. We asked two of our Southeast Multifamily Advisory Group leaders, Marc Robinson and Jimmy Adams, to weigh in on the investment sales market.

Robinson and Adams offer up two expert perspectives from our Multifamily Advisory Group, which covers diverse assets and market types throughout the region. Their responses illustrate how select trends remain consistent across the Southeast multifamily landscape regardless of market, and how some diverge by asset class and market tier. Marc is Vice Chair, based in our Charlotte office, specializing in Class A institutional deals in Charlotte and across the Southeast. Jimmy is Executive Managing Director based in Birmingham, specializing in Gulf State properties in Alabama, Mississippi, Louisiana and Northwest Florida.

KRISTINA GARCIA: Urban vs. suburban remains a big topic among the investment community. How are suburban assets fairing in your markets?

ADAMS: There is a comparable level of interest among suburbs and intown properties, as different equity buckets target unique opportunities, and all equity buckets seem full right now.

ROBINSON: There is ample supply of newly built suburban product on the market right now, and that has caused some shift on the pricing and marketing of these assets.

What kinds of properties are most attractive to investors?

ROBINSON: Value-add assets are in highest demand, particularly assets built post-1990 with 9-foot ceilings that are located in good school districts. There is a great opportunity to improve those assets with interior unit finishes and community amenity packages that match those of the newly built assets.

ADAMS: Value-add assets continue to garner the most interest due to their higher IRR opportunity.

With rents continuing to increase have you noticed a rise in concessions as well?

ADAMS: Suburban submarkets in Birmingham have not shown a rise in concessions because their new supply pipeline is less robust, therefore resulting in fewer rent specials in these markets overall. Core submarkets are more likely to deploy concessions. Recent examples in Birmingham show that top-end, new-construction properties in core have not needed to use concessions once stabilized. 20 Midtown II and Park 35 both opened in core Birmingham submarkets in 2017 and are stabilized with effective rents above $2.00 per square foot without concessions.

ROBINSON: In secondary markets like Atlanta, Charlotte, and Nashville (or primary markets in the Southeast), concessions in core submarkets have increased over the course of this cycle, which is primarily a result of the relatively high concentration of new construction properties that are delivering in urban cores and at roughly the same time. New-construction properties in lease-up have also diversified their concession offerings and become more creative with the structure and delivery of concessions in order to maximize their impact on attracting and retaining tenants. Suburban submarkets have had fewer concessions overall due to historically lower supply (fewer multifamily deliveries) and competition.

Are buyers and sellers on the same page in terms of pricing?

ROBINSON: The market is efficient and informed. For institutional/new-construction Class A assets, developers are testing the waters by offering assets to the market that are not yet stabilized and are in the initial phase of lease-up (as opposed to being offered close to reaching stabilization). Per CoStar, the average occupancy rate of new construction properties in Charlotte at the time of delivery has decreased from the high 40% range in 2014 to the low 20% range in 2017 and 2018, which creates more room for a disconnect regarding expected cashflow at stabilization. If an asset is taken to market too early in the lease-up period, there can be a gap in pricing expectations in that scenario. Otherwise, the market is efficient, and generally there are numerous buyers at the top pricing levels.

ADAMS: Generally, pricing is still aggressive, and the gap has not been too significant to hinder transactions. We haven’t seen prospective buyers lower their pricing yet, but we are seeing fewer people at the table on the top-end deals.

Can you give an example of a recent sale you feel exemplifies trends in your market?

ADAMS: Our recent five-property, more than 2,000-unit Mobile5 portfolio sale highlights current demand in tertiary markets and in the value-add space. Each of the assets, built between 1951 and 1982, has been excellently maintained. Craig Hey and I represented the seller, Colony Hills Capital, in the $134.3 million sale. With three major portfolios sold in Mobile in the past year, we are seeing investors pursue the metro as a high-growth market with new eCommerce, logistics, aerospace, and port/ship-building jobs supporting Mobile and the Gulf Coast’s future.

ROBINSON: Investors are becoming much more creative in the ways they seek desired returns, including in lease-up (pre-stabilized assets), as well as assets in secondary and tertiary suburban markets like Junction at Antiquity in Cornelius, North Carolina. The 329-unit property was built in 2017 and has progressed well in its lease-up period. The property sold for just under $190,000 per unit.

Kristina Garcia is the lead multifamily research specialist in the U.S., overseeing quarterly multifamily market reports for the Southeast and South Central regions in addition to providing in-depth macro market analysis for brokers and clients that reaches beyond the multifamily space. Generating more than $42 million in revenue in 2017, the Southeast Multifamily Advisory Group spans more than eight states and is the primary hub for Cushman & Wakefield’s multifamily practice in the U.S.

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