Huntsville multifamily investment guide

Huntsville has the most concentrated employment base of any market in this series, and the concentration is unusual in kind rather than merely in degree.

Professional and business services is the largest sector at 70,600 jobs, which is about 23.9 percent of the metro’s 295,400 total nonfarm employment on our arithmetic. No other market we have researched has any single sector above about 20 percent of employment. Government adds a further 59,300, about 20.1 percent. Together those two categories account for roughly 44 percent of all jobs in the metro.¹

In most metros a large professional services sector means law, accounting and consulting serving a diversified local economy. Here it substantially means engineering and technical contracting serving Redstone Arsenal, the Army’s missile and aviation commands, NASA Marshall and the agencies clustered around them. The government line and the professional services line are not two independent sectors. They are two sides of the same federal budget.

One further figure makes the point. Total nonfarm employment of 295,400 exceeds the civilian labor force of 284,400, which means this metro imports workers across its boundary every day. A job base larger than the resident workforce is the signature of a regional employment magnet, and it widens the geography a well-located rental asset can serve.¹

For an owner of workforce housing the quality of this demand is genuinely high. Contractor and federal engineering salaries are well above the regional median, the work is not seasonal, and Redstone cannot be relocated. Unemployment is 3.1 percent and the poverty rate is 9.6 percent, the lowest we have measured anywhere.¹²

The risk is equally plain and it should be named rather than softened. Roughly 44 percent of this labor market is downstream of appropriations decisions made in Washington, and government employment already fell 1.0 percent over the last twelve months. Program consolidation, a sequestration episode or a base realignment would hit this metro harder than a diversified one. We regard that as a real tail risk rather than a reason to stay out, and it belongs in a memo’s risk section explicitly.¹

• Professional and business services 70,600 jobs, about 23.9 percent of the metro.¹
• Government 59,300 jobs, about 20.1 percent. Roughly 44 percent combined.¹
• Jobs (295,400) exceed the resident labor force (284,400): this metro imports workers.¹
• Unemployment 3.1 percent and poverty 9.6 percent, both the best we have measured.¹²

The government line and the professional services line here are not two sectors. They are two sides of one federal budget, and together they are about 44 percent of the metro.

This is the most important thing in this guide for anyone underwriting an Alabama acquisition, and it is a place where a casual reading of secondary sources produces exactly the wrong answer.

The Alabama Department of Revenue publishes four property classes. Class I is utility property at 30 percent. Class II is "All property not otherwise classified" at 20 percent. Class III is "All agricultural, forest, and single-family owner occupied residential property", including owner-occupied manufactured homes and historic buildings, at 10 percent. Class IV is private passenger vehicles at 15 percent.²

Read the Class III definition carefully, because the qualifier does the work: single-family owner occupied. A house that is rented out is not Class III. Neither is an apartment building. Both fall to Class II, and the assessed value on which millage is levied is therefore calculated at 20 percent of appraised value rather than 10 percent.

That is a doubling of the assessment base for the identical building at the identical appraised value, purely as a function of how it is occupied. It is a larger differential than South Carolina’s six percent against four percent, which we set out in the Greenville guide, and it is the largest in this series.

Alabama millage rates are genuinely low by national standards, which is why the state has a reputation as a low-property-tax jurisdiction, and that reputation is accurate for a homeowner. An investor is taxed on twice the base, so the effective burden on a rental is materially different from the headline. Applying a homeowner’s experience of Alabama property tax to a rental pro forma will understate the line by roughly half.

Class III is single-family OWNER OCCUPIED at 10 percent. A rental is Class II at 20 percent. Alabama’s low-property-tax reputation is a homeowner’s experience, not a landlord’s.

This is a market we would transact in selectively, close to the Arsenal and the research park, at a basis that does not require rent growth, and with the tax line modeled correctly from the first draft of the model rather than corrected later. Our method is set out in how we evaluate a market, the fee structure is on the fee page, and the mechanics are in how to invest.

• Is the post-close tax line modeled at Class II, 20 percent of the purchase price, under the correct county millage?
• Was the property previously Class III, and does the model reflect both the classification change and the removal of the 7 percent cap?
• What happens to the model if the cap limitations are not extended beyond the fiscal year beginning October 1, 2027?
• What share of the tenant base holds a federal or contractor paycheck, and against which programs?
• What is the delivery pipeline within three miles, against a county permitting about 2.1 percent of stock a year?²
• What rent growth does the model assume, given a $353 rent-to-own gap and a 3.5 times price-to-income ratio?²
• What share of the projected return comes from operations rather than the exit?

Two numbers decide a Huntsville deal: the assessment ratio you modeled, and the rent growth you assumed. Both are usually wrong in the seller’s favor.