Susan Hayden

To gain some perspective on today’s multifamily market, Southeast Real Estate Business looked to a few prominent multifamily brokerage companies in the Southeast. We talked to Marc deBaptiste, principal of Apartment Realty Advisors, about Florida markets; Larry Orr, partner and owner of The Apartment Group of Cushman & Wakefield, about Atlanta and the Southeast in general; and John Brown and Herb Chase, senior managing directors with Insignia/ESG, about major markets across the Southeast.

SREB: What trends do you see presently in the multifamily markets in which you work?

deBaptiste: Some of the trends we’re seeing globally are a reduction in supply of new units coming into the marketplace and, generally, occupancies increasing and concessions diminishing.

Orr: The secondary markets and tertiary markets around the Southeast seem to be in more demand from investors than the major cities are. The economics of the multifamily properties [in second- and third-tier markets] have held up much better than [in cities like] Atlanta, Charlotte and Raleigh, due to the fact that there weren’t as many job layoffs or job losses. They don’t have the big technology, transportation and tourism centers that were affected by the economy and September 11. Also, they did not have the oversupply and building of multifamily that these major cities had over the last couple of years.

Brown

Brown: From a brokerage perspective, there are a lot of deals being talked about and what sounds like very high pricing relative to the performance of the properties. That’s fueled in some part by the attractive debt that’s out there. There have been a lot of deals under agreement or under discussion at very strong pricing, but when the buyers really get in and investigate the performance of the property, there’s been a fair amount of re-trading.

Chase: The inventory right now in Atlanta is around 336,000 units, and there are roughly 14,000 permits, which is kind of on the higher side. That, combined with 50,000 or 60,000 job losses, makes it very difficult to absorb the new inventory given that some of the existing inventory is dropping in occupancy. Even with that, somehow Atlanta absorbed about half of the new inventory coming on the market.

SREB: Are certain types of projects being developed more than others?

deBaptiste

deBaptiste: In markets like Miami-Dade County and Broward County, and to some extent even in Palm Beach County, we’re seeing that a lot of the new deliveries that will come on line in 2003 and 2004 will be in the form of mid-rise and high-rise types of products as opposed to garden communities. That is directly related to the reduction of available suburban land that’s suitable for garden apartments. And much of that is located east of Interstate 95.

What that means is that the rent structure for mid-rise and high-rise products is significantly higher than for garden apartment communities, given their cost to create and cost to operate. So you will see rents spiking by virtue of the types of products being delivered in the marketplace. That should bode well for existing garden apartment communities because there will be a significant spread between the two.

Orr: In this economic environment and real estate environment, developers are much more cautious and have to do a lot more due diligence on the front end because there are risk factors where you build today.

What we’ve seen in Atlanta with the low interest rate environment is that the typical renters have been able to purchase condominiums or houses. And that’s really had an effect on the apartment market. But recently, because the concessions [are] so great now, the person who might have bought a condo or house is choosing to rent a Class A unit in Midtown Atlanta for a lot less than what it would cost to buy something.

SREB: Are landlords offering more concessions or lowering rents in order to stay competitive?

Orr: There hasn’t been as much fluctuation in the economics of the deals, whether it’s concessions, lowering of rents or decrease in occupancies, as you see in the major cities in the Southeast. Therefore, we have more demand and more buyer interest in the secondary or tertiary markets. In Atlanta, Charlotte and Raleigh, anywhere you go you can negotiate 2 to 3 months’ free rent, prorated over the term. In the secondary markets, it’s more like half a month to a month.

Chase

Chase: The B and C properties have really suffered because the A properties, desperate to find tenants, are now lowering some of their standards. So the A properties are getting B tenants, attracted by 2 to 4 months’ free rent or a brand new or substantially better unit than they’re used to, and it’s created a lot more vacancy in the B and C properties.

SREB: Tell us about some of the major sales you’ve recently completed or that are currently in progress.

deBaptiste: A transaction we recently completed in the Tampa Bay market on the bay in Clearwater was a newly constructed garden apartment called The Grand Bellagio at Bay Watch. We capitalized the transaction, and it sold for approximately $178,000 per unit. It has 311 units that average about 1,450 square feet and have some unique amenities, such as direct access garages and access to a boat slip and marina. The property is now being converted to for-sale condominiums by Del American properties.

We also sold Club Meadows, a 410-unit development in Boynton Beach, to Lincoln Property Company for $28 million. And we recently sold Mizner Village, a 275-unit property in Delray Beach for Archstone-Smith. It was purchased by a California-based pension fund advisor for close to $36 million.

Orr

Orr: In New Orleans’ warehouse district, we are currently marketing a 703-unit property for Crow Holdings and Greystar, called The Saulet. It’s a significant development because New Orleans hasn’t seen anything like it. No one goes in and builds this type of high-end property. The total rentable square footage is 622,199, with 7,020 square feet of commercial space. We’re asking $99 million, which is $141,000 a unit, or $159 a square foot.

Another deal we just closed in Charleston was Daniels Landing, a 295-unit development on Daniels Island and one of the highest high-end development deals in Charleston. Madison Development Group, a condo converter, closed on the property on March 27. It was a record-breaking sale, but it was also a property that was bought to convert to condominiums.

Brown: We’re selling two properties in Dunwoody, Georgia — Mt. Vernon Place and Dunwoody Place. The 800-unit developments are currently owned by Corman Communities and Goldman Sachs. They were both offered at about $130,000 a unit, and they are trading at full prices. So there are still a lot of people who believe that well-built properties in good locations are great investments, relative to the return that’s available in other investment arenas these days.

Chase: We’re marketing a portfolio of three assets in Orlando, Lakeland and Tampa on behalf of Lane Companies. Summer Club is a $24 million property that Lane developed approximately 2 years ago in Orlando. It has 294 units, and we’re marketing it for roughly $24 million. The next one is Enclave at Richmond Place in Tampa, a 280-unit development that we’re marketing at $23 million. And the last one we’re marketing for Lane is Summer Landing, located directly between Orlando and Tampa. It’s a 288-unit asset that we’re selling for around $20 million.

SREB: What is your outlook for the multifamily market in your area?

deBaptiste: We’re seeing people move from markets like the Northeast and Midwest to Florida without necessarily having a job when they move. They’re first changing their lifestyle and then finding a job, and that’s caused a bit of a different approach to identifying demand generators for apartments. Typically that’s done by looking at what employment growth is in a particular market. So here we have an in-migration of people in addition to job growth that’s spurring the demand for multifamily.

Orr: It’s all predicated on job growth. We need to get this economy turned around and start creating jobs to fill up these apartments.

Brown: I think the remainder of 2003 is going to be relatively flat for any type of economic rent growth. We predict that there will be some rent growth in 2004, and the rent growth may come in the form of reduced concessions as opposed to true rental growth.

Chase: The hope is that by the end of 2004 and into 2005, you’ll see occupancies rise up into the low- to mid-90s again, with job growth and population growth and much lower new permitting and apartments. And that’s the hope for all of the markets and the only reason investors are buying right now. They hope they can buy these properties on low interest rates and regain a lot of the tenants that have been lost, thereby increasing the income significantly. It really comes down to job growth.

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