Q&A with Dale Henson: Fundamentals of Apartment Market Will Likely Start Positive Turn By Late 2010 or Mid-2011

Dale Henson formed the Atlanta-based Dale Henson Associates in 1970 as a non-contingent real estate development advisory firm. It provides market-based analytical services to developers, investors and lenders in the Atlanta area. The firm does not provide brokerage services.Henson, who now serves the company as president, has represented clients in real estate consulting since 1967. He is a frequent speaker for the Urban Land Institute. He talks to Online News Editor Anuradha Kher about the multifamily market in Atlanta, when he thinks the fundamentals of the apartment market will turn around and how the shadow market is affecting Atlanta’s apartment market.MHN: How is the Atlanta multifamily market doing?Henson: At the end of 2008, average occupancy in all garden apartments in the 11-county market area was 88.6 percent, down 250 basis points from 91.1 percent at the end of 2007.During 2008 construction started on 5,922 units, down from 11,321 units started during 2007. Most of the new development activity during 2008 was in the “urban” apartment product (designated as four-six levels, mostly stick-built, deck parking, interior hallways). And all of these were built inside the Perimeter I-285. During 2008 4,124 urban units started construction—70 percent of the total starts.The “inside Perimeter” urbans have performed much better than the gardens. Average Class A urban effective rents dropped only 2.8 percent during 2008, to $1, 137, and occupancies dropped from 94.4% to 91.7 percent.MHN: How is the delivery and absorption of units doing?Henson:See graphic below. Delivery of new units was up during 2008 to 8,412 units, from 7,000 units during 2007. Surprisingly, absorption of new units during 2008 was marginally up from 2007, to 6,275 units from 6,217 during 2007.Overall, the inside Perimeter submarkets outperform the outside Perimeter garden product. No “urban” product has been built outside the I-285 Perimeter (the Dunwoody area fronting I-285 is considered inside the Perimeter). MHN: When do you think the fundamentals of the multifamily market will start turning around?   Henson: The fundamentals of the apartment market will very likely not start a positive turn before late 2010 or mid-2011. Most of our clients are very interested in a disinterested experienced assessment of just how serious the situation is now, and how long will it likely take to see positive daylight. It helps that members of our staff have academic economic credentials, but in this turbulence—not much!!MHN: How is the condominium market doing?Henson: The huge oversupply of condominium units in the towers just completed or under construction with over 6,000 units will very likely intrude into the rental apartment markets for an extended period. One 94-unit tower built as condominium recently terminated the contracts received, and converted to rental. Another 4-6 level 352-unit development recently completed adjacent to the Lindbergh MARTA (rapid transit) station built as condominium is now converting to rental. Two condominiums in the very successful brownfields redevelopment, Atlantic Station, recently auctioned the remaining units.MHN: What impact is the shadow market having in Atlanta?Henson: The competitive shadow market from the condominium towers is already being felt in the Buckhead and Midtown submarkets. Many of these towers that were converted during the 1990s are joining the new towers in offering rental units that compete with the new “urban” product recently opened in these urban submarkets. For example, in the class A apartments  in the Buckhead submarket effective rents dropped 7.4 percent during 2008, and occupancies  dropped from 92.7 percent to 86.1 percentMHN: What kind of multifamily financing is still available in Atlanta?   Henson: As elsewhere in the country, financing is not available for new apartment development except for an occasional HUD 221(d)(4).(All charts have been provided by Dale Henson Associates)