3 challenges facing multifamily assets in 2023 in Atlanta

Heading into 2022, the large multifamily market in Atlanta was one of the most promising areas for investors to focus their capital. Rent growth, asset valuations, and operational efficiencies were all flashing green signals across all classes of multifamily assets in Atlanta. In many ways, there are still ample opportunities for solid investments in multifamily assets in this market. Yet, there have been considerable short term challenges for Class-C multifamily assets in the last 12 months.

At New Sight Capital, we have the advantage of being general partners across Class A, B and C assets of multifamily properties. This allows us to compare and contrast geographic markets as well as classes of properties. Having 2 Class-C properties in Atlanta, we can tell you this niche area of the market has some challenges we’ll outline in this article.

Before we do that, as a point of reference, we’re loosely defining Class-C multifamily properties as being older than 1980 with limited sets of amenities and mostly working class tenants. A value-add Class C is one in which the long-term business model entails rehabbing the property and/or units to a degree that significantly improves NOI and, hence, valuations for investors. Now that we’ve defined Class C, value-add properties, here’s 3 challenges they face in the short term:

Painfully slow eviction process

It’s amazing to see how different the eviction process is based on geography. While it may take a week or two to evict a non-paying tenant in one market, it can take several months in another market. Atlanta definitely falls in the latter category–and it’s even been made worse in 2022 and 2023.

Many syndicators making Class-C multifamily acquisitions in 2021 and early 2022 were underwriting the evictions process to take 2 to 3 months. That was already longer than many of the more eviction-efficient markets. As 2022 wore on though, and COVID-related housing assistance went away, there was a rapid increase in the number of evictions. As a result, the system for evictions of no-paying tenants was overloaded. Instead of taking 2 to 3 months, the whole process was now taking 6 to 9 months or longer.

Obviously, this creates situations where non-paying tenants are allowed to stay in units until the eviction process is completed. And although we all have empathy for those experiencing financial troubles, the lenders, vendors, tax offices, and insurance companies will not have compassion on the operators’ financial obligations. Bills have to be paid and investors contributed significant capital with the expectation of returns. Those units must be rented out to paying tenants in order for everyone to be paid.

Class-C in particular seems to have this issue in Atlanta. Properties in the B and A classes are not as affected as the tenant base is less likely to face the eviction process to begin with.

But the sluggish eviction process facing Class-C multifamily properties in Atlanta is affecting cash flow. Assets that may have paid distributions to investors have put those distributions on pause to conserve working capital. Worse still, some Class C assets in Atlanta have had to return to investors to acquire more working capital to weather the storm.

The good news is there are signs developing that the release valve is slowly being opened. As that happens, the backlog of evictions in Atlanta will improve–allowing operators the opportunity to remove non-paying tenants with large balances and find more financially responsible and predictable tenants. Longterm, there is the expectation the eviction process will return to the historical 2-3 month timelines, but in the near term there is cash flow pain from this challenge.

Collections

Every multifamily operator has to monitor and combat monthly rent collection issues. Most Class A and B assets don’t have major issues, but a lot of Class C operators will put into motion staff protocols to increase monthly collections—so this isn’t an Atlanta market issue per se. But, knowing the eviction process is so backlogged may cause some tenants to run a month or two behind—which decreases collections in addition to any collections lost due to tenants being under eviction. While a month-late payment would trigger evictions in other markets, it has to be tolerated to some degree in the Atlanta market because the eviction process can now take so long.

However, as the eviction backlog improves in Atlanta we are seeing signs of improving collections. In addition, operators have had to develop new ways to improve timely payments. This may include prompt-pay discounts, as well as instituting rent-financing from 3rd parties working with tenants. Creating more automated rent payment systems and phasing out legacy means of payment are also effective in ensuring collections are healthy each month.

Inflation

The impact of rising costs is definitely not unique to Class C properties in Atlanta. However, it’s important for investors currently in these assets to understand that inflation is impacting cash flow. Just as with all industries, payroll costs have increased significantly. Since staff at the property is essential to the asset’s success, wage growth is nearly unavoidable. Likewise, the costs charged by 3rd party vendors and servicers have increased. These also are essential expenses. While rent growth can help absorb some of these costs, it still is affecting cash flow. As these costs start to stabilize, these assets will be better positioned. While rent growth will be muted in 2023, many industry experts project a return to robust rent growth in 2024 and 2025. In essence, this challenge is a short term headwind but there are greener pastures over the long term.

Based on our experiences in 2022 and 2023, we see these as the 3 biggest challenges facing Class-C multifamily properties in the Atlanta market. While these 3 are creating financial risks in the short term to these properties, the cyclical nature of these challenges means we will see improvement at some point. For investors looking to deploy capital in these Class C properties in Atlanta, it’s important to enter deals that are highly capitalized and very conservatively underwritten in terms of expenses, rent growth, collections, valuation growth and returns. For investors who are already in these assets, it’s important to keep a long term perspective in mind. Syndications are 5-6+ year investments anyways. As headwinds turn into tailwinds, there will be opportunity for stability and equity growth over the long term.

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