As Atlanta plows ahead with post-recession construction projects, many have wondered aloud that we may be creating another bubble.
Through the boom, residential development has been at the forefront, with apartments the product of choice for many developers. Recently, developer Pollack Shores killed a project slated to bring 325 units to Buckhead Village – an area already awash in apartments. Time will tell if that's a bellwether of things to come or an isolated incident.
To better understand the economics of the boom, and see if we could get to the bottom of whether the market has topped out, we spoke with KC Conway, senior vice president for SunTrust Commercial Real Estate for this week’s segment of Field Note Fridays.
CURBED ATLANTA: Atlanta is experiencing an intown real estate boom. Is all the residential construction in the city indicative of growth in Atlanta that outpaces other urban areas of the country, or is it fairly in line with trends?
KC CONWAY: The Southeast now produces about 21 percent of the nation’s GDP, ahead of all other regions in the country. Atlanta’s economy ranks 10th in the nation for GDP, and was in the top five MSAs for job growth in 2015. This economic strength is driving the residential market locally. The move toward urbanization is nationwide, and Atlanta is certainly consistent with this trend.
CURBED: And is the trend of residential development in the urban core having any impact on the single-family residential market in the metro?
CONWAY: The trend of urban residential development is being driven by demand. People – particularly younger ones – want to be closer to work, restaurants, shopping, and entertainment. They are also making an effort to become less dependent on driving and owning a personal vehicle, preferring mass transit or ride-sharing services instead. Increasing traffic congestion will likely enhance the attractiveness of urban living versus suburban living, particularly if jobs continue to be clustered in the urban core.
CURBED: Many are expressing concerns about the relentless construction of apartments. Are we getting dangerously close to overbuilding? Is this a bubble?
CONWAY: Several markets around the country are showing signs of overbuilding in the multifamily sector, including parts of Atlanta. Like other cities, rent growth for multifamily in Atlanta is showing signs of decelerating, which should restrain overbuilding. That being said, factors change from one neighborhood to the next. Midtown, for example, will likely remain an attractive place for multifamily development – even as other markets in metro Atlanta get softer.
CURBED: What is driving the construction of rental units instead of condos?
CONWAY: Two factors: demand and financing. There is not a huge demand for condo units, and buyers of condos are more likely to have difficulty obtaining a mortgage, which is why we see developers moving toward apartments.
CURBED: When can we expect the apartment construction trend to slow down in favor of condos?
CONWAY: This is difficult to predict. Millennials are driving this market, and where they will want to live as they age and make more money? Will they want to buy a condo intown – or purchase a home in the suburbs? The answer to that question could indicate whether condos return to favor.
CURBED: Often we hear that millennials don’t want to buy and therefore are contributing to the boom in rental development. Is there truth to this?
CONWAY: Anecdotally, yes. Many millennials want the flexibility to move jobs and may not want the responsibility of a mortgage. Also, we see millennials more focused on experiences and spending their savings on things like educational vacations. As they age, this will likely change, so we may see this develop over time.
CURBED: A slow trickle of condo projects are beginning to crop up, but seem to trend to a niche ultra-luxury market. JPX Works is hoping to start selling units in the Emerson starting at $1.8 million. Do you think there is a strong enough market for developments of this level?
CONWAY: While I am not familiar with this particular project, any ultra-luxury real estate product can be expected to have a very narrow target purchaser who can afford real estate at high price points. Whether this project is successful or not will depend on whether there are enough of these purchasers in Atlanta who desire this particular location and product. This scenario is fairly typical in commercial real estate development regardless of property type (office, multifamily, etc.).
CURBED: Is there a reason we aren’t seeing construction of intown offices, and can we expect that to change as we saturate the market with residential development?
CONWAY: Office development is driven by demand, which means it is very difficult to finance a speculative building unless you are a very strong borrower. As jobs are created and companies expand and, or, relocate, these factors will likely drive additional development intown. Buckhead and Midtown compete for new office developments and both have their own unique selling points. Ultimately, I believe the competition will be good for both areas – and a boon to metro Atlanta overall.
- Field Note Fridays, the roundup [Curbed]