The takeaway ….
Driving through the streets of Atlanta and new apartment building development appears on the rise. I shudder to think what rents may be for these new developments. I have seen prices for new multi-family developments in the East Atlanta/Inman Park/Reynoldstown area starting at purchase prices in the upper $500K range. Yes, the city is affordable for those with the right kind of capital. Prices like these make the phrase “affordable housing” sound comical.
On the supply side, Federal Reserve Bank of Atlanta president and chief executive officer Raphael Bostic noted in an interview last week with Bloomberg that the Bank sees distress in commercial real estate due in part to U.S. commercial banks tightening their lending standards. Bankers, according to President Bostick, are being cautious and hesitant and not looking to lend as robustly.
President Bostic specifically mentioned that the distress is targeting the multi-family sector and that financing costs are driving down valuations.
The real estate industry apparently concurs with Mr Bostic’s assessment. Among the insights shared during a commercial real estate summit covered by media outlet Bisnow, rapid rises in interest rates have wreaked havoc on commercial real estate. As property values have fallen due to increased interest rates, banks have pulled back on lending. Financing is available, but it is much more expensive to obtain and takes longer for approval. Part of the expense comes from the need for a borrower to bring more collateral to the table to facilitate the loan.
I am not a forecaster and don’t pretend to be one even if I slept in a Holiday Inn, but it would appear that as the new construction is completed, Atlanta will have to deal with negative consequences that stem from decreased valuations flowing from excess supply. A rising rate environment combined with decreased valuation of collateral will likely result in an economic slowdown in the city. An economic slowdown means less in property and other tax revenues for the city coffers.
The alleged resiliency of the consumer is a media narrative that I expect will wane over the next twelve months. In theory, lower interest rates are supposed to help boost recovery. As an alleged rate dove, this is where Mr Bostic’s voice may come in handy. First, let’s let the consumers’ resilience play out.
Alton Drew
6 November 2023
The stats …
30-Day Federal Funds Options and Futures: 94.71
Discount Window rate: 5.50%
Interest on Reserve Balances: 5.40%
Effective Federal Funds Rate: 5.33%
Two-year Treasury: 4.89%
Ten-year Treasury: 4.63%
Sources: CME Group. Board of Governors-Federal Reserve System. Bloomberg.
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