Slowing Construction Helps Steady Weakened Atlanta Apartment Market

By Erika Schnitzer, Associate EditorAtlanta—Reduced completions and decelerating job losses are anticipated to stabilize Atlanta’s apartment vacancy, according to Marcus & Millichap’s second quarter Apartment Research Market Update on the Atlanta metro area. While approximately 3,300 units are slated for delivery this year, 4,500 units were completed in 2008. And 4,500 permits for multifamily housing were issued in the first quarter of 2009, down from 5,400 year-over-year.“Atlanta is not a supply-constrained market, so that lends itself to potential issues,”  John Leonard, regional manager of the Atlanta office of Marcus & Millichap, tells MHN. “I think at this point, we won’t bring as much product online, as the market is in a lull, but the development pipeline can ramp up quickly, so that’s a concern for some outlying areas.”Despite this, the report found that approximately 14,000 apartments are in the proposed construction pipeline, mostly north of downtown Atlanta, with a particular focus in the Sandy Springs/Dunwoody and Roswell/Alpharetta areas.Leonard notes that the “outside perimeter” of Atlanta “can get some good construction going,” while the inside perimeter usually consists of redevelopment or adaptive reuse of existing buildings. However, he does note, “construction has been put on a shelf, so we will deliver below-average for hopefully a year or two.”The Buckhead, Midtown and Central I-75 West submarkets are expected to receive most of the planned new development this year, as these are markets in close proximity to large employers.While there is some effect from the shadow market, “we didn’t overbuild in the condo market, but there is some supply that will impact the rental markets,” notes Leonard. While the report shows that vacancy is projected to rise 90 basis points this year, to 11.2 percent, the pace has slowed considerably and remains unchanged thus far in 2009. Year-over-year, vacancy increased 160 basis points.Despite this lack of change in 2009, vacancy did increase 210 basis points—to 9.7 percent—in Class A apartments during the year ending in the first quarter 2009. Meanwhile, Class B and C projects saw an increase in 140 basis points—to approximately 11.2 percent.Asking rents are predicted to decline 3.8 percent—to $828 per month—with effective rents projected to decline only 2.3 percent—to $750 per month. Additionally, according to the report, Class A rents are approximately $216 per month more than the monthly mortgage payment for a median-priced residence. The investment market is also constrained, with transaction velocity falling off 47 percent. Bank-owned distressed assets will dominate the transactions that do occur, Leonard notes, as lenders will be looking to “recover loan dollars more readily.”Metro-wide cap rates have increase 50 to 75 basis points year-over-year. Class A properties are trading in the mid-7 percent range, while Class B and C properties are trading at 8.5 to 9.0 percent.Despite all this, Leonard notes that Atlanta has a number of “good economic drivers” that will hopefully help the market turn. “Government and education are still doing well, and that’s a majority of our economic base, but if we can get some other sectors hiring in the market, we’ll get the positive sign we are looking for.”