AS IN MANY OF the nation's metro areas, 2009 was not a pretty year for Atlanta. Rent growth and occupancy rates fell with each passing month, and fundamentals will soften further through the first quarter of this year as a result of weaker demand.
The main culprit: job loss. Roughly 91,000 positions were trimmed from local payrolls, driving up the unemployment rate almost 270 basis points (bps) to 10.5 percent as of October 2009. While job losses are expected to continue in the near term, there is reason for optimism. The pace of unemployment is slowing, and the pipeline of new units coming online will significantly tighten by mid-summer 2010.
Additionally, completions in 2009 dropped to their lowest levels since 2004, which should help vacancy rates stabilize toward the end of this year. And just beyond that, in the first quarter of 2011, effective rent growth could potentially return to the market.
A Slowing Pipeline
Construction activity has remained somewhat steady as builders completed 5,000 rental units during the 12-month period ending in the third quarter of 2009, representing a 1.5 percent increase in stock. This was a bump up from 2008, when rental inventory expanded by 4,500 units.
But the rate of completions is expected to slow dramatically this year. Nearly 3,600 units are under construction in the market, with more than 1,500 units slated for completion in 2010.
The planning pipeline contains nearly 14,700 units, though it's unclear how many of these units will come to fruition. Nearly 6,000 of those units are planned in the Midtown submarket, an area also experiencing substantial office development.
Supply growth and weaker demand contributed to an 11.1 percent vacancy rate at the end of the third quarter of 2009, up nearly 180 bps since the third quarter of 2008. Third quarter vacancy of 9.6 percent at Class A properties was 100 bps higher than year-end 2008. Additionally, the loss of 27,600 construction jobs since September 2008 has helped to escalate vacancy in the metro's Class B and C units by 260 bps, to 12.1 percent. The current rate is also up 160 bps from the end of 2008.
The weak job market and expanding rental stock will likely push vacancy to increase to 11.5 percent in the first quarter of 2010, a 90 bps increase since the beginning of 2009.
Asking rents continue to decline in metro Atlanta but are expected to stabilize by the end of the year. Effective rent growth, though, will be slower to recover due to increasing concessions.
Asking rents averaged $849 per month as of September 2009, a decline of 1.5 percent from year-end 2008. Effective rents of $756 per month were down 1.6 percent in that time.
Meanwhile, Class B and C asking rents fell 1.1 percent year-over-year to $722 per month in the third quarter; a 2.5 percent loss to $970 per month was posted in the Class A sector.
Given the drop in demand, it's no surprise that owners have further increased concessions. Concessions were 11 percent of asking rents in the fall of 2009, up from 10.5 percent of asking rents one year earlier.
This trend won't likely get any better in the near term. Asking rents are expected to drop another 2.3 percent to $842 per month, while effective rents will decline 4.3 percent to $749 per month in the first quarter of 2010.
Transaction velocity is expected to remain constrained through the beginning of 2010, given investor caution over the short-term direction of the market. Deal flow has declined by more than 60 percent over the past two quarters, and prices will likely moderate further into 2010 due to waning demand.
Cap rates are currently averaging in the mid-7 percent to low-8 percent range for Class A properties, and B and C assets are trading at initial yields of about 100 bps higher.
Tepid investor demand and more conservative financing expectations are projected to drive cap rates higher through the first half of 2010. Investors will continue to focus on more stable, affluent residential pockets in the northern portion of the metro, such as north Atlanta, Sandy Springs, Roswell, and Alpharetta.
Transaction velocity will remain limited in the near term due to weakened fundamentals and the persistent expectations gap, though stabilized properties continue to garner interest, especially in higher-demand residential pockets north of downtown.
Owners looking to exit the market should consider selling now, as prices are likely to moderate further given projections for increasing concessions and rising vacancy rates.
In all, Atlanta-area owners will hope to minimize the damage of the recession this year while casting their eyes to sunnier skies by the end of the calendar. Some short-term pain is expected, but there is renewed optimism that the bottom of the market is near and the climb back up is close behind.
John Leonard is a vice president and regional manager of the Atlanta office of Marcus & Millichap Real Estate Investment Services.