Why More Renters Are Shifting to Class B Multifamily

“Relative to other major metropolitan markets, Atlanta offers a more affordable ‘overall’ housing environment.

ATLANTA—Historically low homeownership, due in large part to the evolving housing preferences of the 18 to 34 demographic, is driving unprecedented demand for multifamily communities. About 43 million families and individuals lived in rental housing in mid-2015. That’s up nearly 9 million from 2005—the largest gain in any 10-year period on record, according to Harvard University’s Joint Center for Housing Studies. “Relative to other major metropolitan markets, Atlanta offers a more affordable ‘overall’ housing environment,” Philip Martin , vice president of market research at Waterton, tells GlobeSt.com. “The median rent to income ratio for the metro is 22%. The median rent to aggregate homeownership costs ratio is 26%. Both ratios are below the 30% level deemed reasonable or affordable, and much lower than many comparable large metros.” Still, more renters are being priced out of the newest multifamily communities as developers tailor their projects to the highest earners. Atlanta, in particular, is one of the major metropolitan areas being hit hardest by this trend. In 2015, 91% of all completed Atlanta area multifamily units were classified as high-end, based on data from RENTCafé. That’s well above the national average of 75% in 2015 versus 46% in 2012. As a result of this affordability crisis, renters are turning to older class B multifamily communities, many of which have been renovated to offer similar finishes and amenities at a relative value to new construction. Average rents at communities like Savannah Midtown, which Chicago-based Waterton acquired in April, are nearly 30% below those of A communities, translating to hundreds of dollars in savings each month. “Despite all of the positives, housing costs, both owned and rental, are increasing across the Atlanta metro,” Martin says. “Annualized rental rate growth has been 5.7% since 2011, while single-family home values have increased 9.5% annually. This has mirrored other large metros, and has been more significant than the nominal increases in wages and household incomes.” The demand for these B class multifamily units is reflected by the national vacancy rate for B and C communities: 3% in the first quarter versus 4.1% for A class properties. Historically, the A vacancy rate has trended below that of B and C multifamily properties, so the latest numbers represent a shift. While this can be partially attributed to all of the new A supply that has come online, it’s driven largely by the affordability of existing multifamily communities combined with a lack of new construction in this segment of the market, according to Waterton. “A shortage of skilled labor and increasing labor and land costs are some of the primary factors driving overall housing costs,” Martin says. “Zoning and entitlement challenges, which can take time and be costly in many Atlanta submarkets, also contribute to increasing housing costs. All of these factors increase housing development costs and limits or delays the incremental, and more affordable, housing supply. This is especially true among single-family home builders, where labor and land costs don’t allow them to build the ‘entry level’ home, except in more remote parts of the metro where many first time home buyers do not want to live.”