Atlanta — It’s no Miami, but Atlanta is still suffering the fallout from the condo bust, just like the sun-splashed city that made “condo crash” a phrase to strike fear into the hearts of developers across the nation. Only in Atlanta, the roller coaster never went too high, so the fall hasn’t been as hard as that of Florida markets, observers say.

The most palpable damage to the Atlanta apartment market has come in the form of a massive exodus of city residents from traditional rental units in the first quarter, as renters abandoned their apartments for the shadow market of condos and single-family homes.

The Atlanta metro area lost 6,700 apartment renter households in the first quarter, pushing absorption into negative territory to the tune of 2,440 units, according to a report from Carrollton, Texas-based M/PF YieldStar, an apartment market research firm. It was the city’s worst quarterly showing in more than two decades.

“You can just look at the level of activity and tell that everything is overbuilt,” said Greg Willett, vice president of research with M/PF YieldStar.

As renters drained out of the apartment pool, the metro’s occupancy rate sank to 91.9 percent, down from 93.6 percent in early 2007, and the lowest reading in three years, M/PF research showed. The declines were shallower in the city’s newer apartment stock, though, with units built in the 1990s falling just 1.2 percentage points to maintain an occupancy rate of 93.2 percent.

Even with the slump in demand in the first quarter, however, owners and managers were able to raise rents 0.9 percent, matching the U.S. average, data from market research firm Reis, Inc., showed. That’s still a slowdown from 2007’s average rent growth of 3.7 percent.

“To some degree, owners are doing the right thing and saying, ‘I’m not going to try to compete with that shadow market on price,’” Willett said. “I question whether that’s going to change if they continue to lose residents to that market.”

The shadow market is much smaller in Atlanta than in most Florida markets, partly because housing prices in the Georgia capital only rose about 40 percent from 2000 to their peak in 2007, giving builders a much smaller incentive to pursue condo developments and conversions than they had elsewhere, noted Sam Chandan, chief economist at Reis. “The extent of the boom in Atlanta was quite modest compared to what we saw in Tampa or Miami,” he said.

The metro area’s apartment inventory grew less than 1 percent a year from 2004 to 2006 and climbed just 1.3 percent in 2007. No new apartments were completed in the first quarter, and the inventory is expected to grow just 0.5 percent this year.

Meantime, the pipeline has shrunk significantly, with permits at around 8,500 for the 12 months ending in April, a 37 percent decline from the same period a year earlier, according to Tom Wilkes, an executive vice president with Post Properties, which owns about 8,000 units in Atlanta and about 22,000 nationwide. “We will eventually absorb the excess condos and the excess supply because permitting is down so dramatically,” said Wilkes, who is also president of Post Apartment Management.

Although he said rent growth has slowed at some of Post’s higher-priced midtown properties—those leasing for $1,500 to $2,000 a month—in response to competition from the shadow market, lower-priced garden-style apartments in infill locations are still doing well.

The firm’s newest development, a 307-unit property in the Buckhead neighborhood, is on track in terms of lease-up and rents, Wilkes said.

Plus, Atlanta is still adding jobs, and population growth is expected to hold steady over the next couple of years. “We don’t observe the same degree of deterioration in fundamentals as we do in other South Atlantic markets,” said Chandan. “There is some extent to which the market is weaker because of condo inventories, but it’s not like what we’re seeing in any of the halfdozen or so Florida markets where this is the dominating issue.”

Those fundamentals are helping to keep investor interest in Atlanta high. Sales volume in the metro was the second- highest in the Southeast in the 12 months ending in March, behind only the Washington, D.C., area, according to data from Real Capital Analytics, a New York City-based research firm.

Volume was $4.46 billion, below the $5.2 billion seen in the Virginia suburbs of D.C., but well ahead of Dallas’ $3.51 billion in transactions. Fulton County was the most active submarket, with $1.7 billion in transactions and an average per-unit price of almost $91,000, compared to the market’s average of $83,545. The average cap rate was 5.6 percent in Fulton County, and 6 percent for the metro as a whole.

For at least the next few years, vacancy rates in Atlanta will remain in the 8 percent range, Reis predicts, as the market works off excess inventory and struggles to reach a positive absorption rate. Still, rents are projected to grow at a modest 2 percent this year, before climbing to a 2.7 percent growth rate in 2009 and 3.3 percent in 2010.

“It’s a market that we don’t have to look too far into the future to see that it will return to some measure of stability,” said Chandan.