Everyone Needs a Place to Live
Maybe you’ve noticed a proliferation of apartments being built in and around Atlanta recently.
Maybe you’ve also noticed some articles where developers quote stabilized vacancy, rent growth, lack of supply, etc. They make all these claims about the key metrics of the market pointing to apartment development.
While I don’t disagree with that analysis I will claim it is too broad to apply to any one project. Even if the market fundamentals of Atlanta point to a demand for new apartments, that doesn’t mean any one project will be a success.
So making statements like “everyone needs a place to live” to support any single project is nonsense because they aren’t relevant to any given project. If I’m an investor looking to put my family’s money in a project, I would expect excellent answers to these questions:
What makes your piece of dirt better than the other 30 that are currently building apartments in Atlanta?
Why will a renter pony up $1.75 psf for your apartment when their current lease is at $1.10?
What is your exit strategy? More specifically, do you think rents will grow at a rate faster than the historical 3% or that you can buy at a 6 cap and sell at a 5 cap?
Given that there are 30 competing projects being built around the city, what amenity package or interior finish will make your new deal shinier and better than the other 29? Why would a renter chose yours when age and amenities are roughly equal for all these new properties?
If Bernanke keeps rates low, why wouldn’t many of these renters become buyers like they did in the last cycle?
Alternatively, WHEN the Fed raises rates, how will that affect your exit strategy? If your potential buyer pool suddenly has much more expensive debt, do you still think you can get that 5 cap?
Maybe I am overly skeptical, but I think there may be two or three developers in Atlanta that could answer those questions to my satisfaction. Again, I may be jaded having seen the ugly back end of over-development in Atlanta, but I think a little skepticism in a time of exuberance never hurt anyone in a big way.
So, Mr. Developer, I have one final thought for you:
Just because everyone needs a place to live doesn’t mean they MUST live at your new apartment. In fact, with several shiny, sexy new apartment complexes rising in the next 24 months, I would argue that you have just an average chance of getting a lucrative share of that renter pool.
Plan and price accordingly, please.
Or don’t and I will buy the building out of bankruptcy in 5 years. Either way.