The commercial real estate market in Atlanta continues steady improvement in the first half of 2014.
Along with Seattle, Atlanta led the nation in vacancy declines at a drop of 60 basis points with technology and health care firms leading the demand for space. With new construction and vacancy rates remaining low, our growth momentum should continue throughout 2014 as the region reaps the benefits of an improving economy and employment growth.
Low Interest Rates
The new Federal Reserve chairwoman, Janet Yellen, plans to keep interest rates near zero, until economic prosperity returns to Main Street. The US 10-year Treasury bond yield continues to remain at historically low levels and is predicted to remain below 3 percent as the world continues to invest in US Bonds amid a slowing and unstable world economy.
Low interest rates have created a favorable investment market, and will continue to drive record prices for quality real estate. Cap rates for Class A multifamily will stay low as long as interest rates stay low, and there is a strong market for 5.5 percent cap rate, Class A deals. Retail centers with prime location and strong national anchors will also continue to see CAP rates remain at historical low levels as investors will benefit from a continued low cost of capital for assets considered “ultra safe.”
Construction and Right-Sizing
In 2013, there was approximately 1 million square feet of retail and restaurant space under construction in Atlanta. Much of this was in three high-profile developments — Buckhead Atlanta, Ponce City Market and Avalon — some of which will come on-line later this year. This is a small fraction of what was being constructed at the height of retail development in 2005 and 2006, when approximately 6 million square feet was constructed to accommodate retailers’ then-large footprint.
Today, many retailers continue to shrink their big-box footprints, which have and will create vacancies in the market. Therefore, we will not see a boom in retail development this year. I predict 1 million square feet of newly constructed projects in the Atlanta MSA will be the trend for a few more years while retailers readjust their brick-and-mortar presence to accommodate the increasingly tech-savvy consumer.
There are more than 10,000 multifamily units under construction inside the Perimeter, which is actually lower than comparable markets, such as Dallas and Houston. Atlanta delivered an overabundance of multifamily projects prior to the recession, and thus construction has remained low to avoid overbuilding.
Rental rates for Class A multifamily properties have hit at an all-time high. However, if wage growth does not follow rent growth, these assets may see a compression on rental rates, which would drop the returns. Many of these units were constructed as rentals with the expectation that they would convert to condos in the near future. I believe we will start to see the first wave of that occurring later this year.
Eyes on New Development
One development the entire city will be watching is the new mixed-use development that will rise around the new Braves stadium in 2017, which will bring new retail and multifamily space to Cobb County.
As financing options continue to expand, we should see sustained growth in multifamily and other high quality, well positioned projects. Luckily, most lenders will hold the reigns back on the speculative type of developments that were popular when the market overheated in the last cycle. Download PDF