Atlanta Apartment Market Strong; Office, Retail Begin to Stabilize
by justinp on May 16, 2012
Employment growth is reinvigorating the Atlanta business market, though it remains well below pre-recession levels. While the housing and construction markets remain weak, other sectors of the economy are showing significant strength, and helping to revive Atlanta’s commercial real estate market.
Atlanta Office Market
Gains in employment, coupled with a lack of new construction, have helped to stabilize the Atlanta Office market.
Net absorption has run positive for the past four quarters, vacancy rates inching downward and positive growth has returned to average rents. While these trends are positive, large volumes of empty space await tenants as a result of the previous, extended development cycle.
The market saw its most difficult period during first quarter of 2011, when vacancy rates hit 21.4% with 30.5 million square feet of vacant stock. Vacancy rates have slipped to 20.6%, with 29.4 million feet of vacant space in the first quarter of 2012 and are expected to finally drop below 20% in 2013.
The Atlanta office market continues to see a flight to quality, with class A vacancy rates down 120 basis points year-over-year to 19%, while the class BC vacancy rate remains flat at 23%. Upscale Buckhead has been the beneficiary of this trend with asking and effective rates inching up, but its vacancy rates remain high at 23.8%.
Atlanta Apartment Market
Meanwhile, the Atlanta apartment sector has benefitted from a number of trends, not least of which is the pressures on the single-family housing market.
The high rate of foreclosure contributed in two ways: First, numerous displaced former homeowners were left with no option but to rent. Additionally, the low confidence in values that arose from the foreclosure crisis served to inhibit home acquisition—as did the increasing stringent requirements imposed by mortgage lenders.
The first quarter of 2012 saw the ninth consecutive quarter of apartment vacancy rate decline in Atlanta, dropping to 7.4% in the quarter, down 180 basis points from the same period a year ago and down 430 bp from the 11.7% peak in Q4, 2009.
With little new construction coming online since 2010, net absorption continues to be strong, at 7,715 units during 2011 and 1,341 units during the first quarter of 2012, a quarter that saw no new units arriving on line.
Though construction is starting to return to the apartment sector (2,343 units are currently reported underway), we anticipate declines in vacancy rates throughout the rest of this year and into 2013.
While demand continues to eat into vacancy rates, its impact on rent rates has been less dramatic. Asking and effective rents inched up only 1.2% and 1.6% respectively during 2011. Similar small gains were seen during the first quarter of 2012, with asking and effective rents of $859 and $772 – bumps of 0.3% and 0.7% respectively. Yet Reis economists forecast more substantive growth for the full year of 2012, projecting 3.2% and 4.7% growth rates, the greatest single-year increase in more than a decade.
Atlanta Retail Market
The Atlanta retail property market is slowly showing signs of life after a lengthy slumber.
Despite sharp cuts in new construction, vacancy rates remain quite high in Atlanta’s community-neighborhood shopping center market. The first quarter vacancy rate of 14.1% was down slightly from its 14.5% peak in the third quarter of 2011, but significantly higher than the national average of 10.9%. While absorption is forecasted to remain positive, Reis economists expect that vacancy rates above 13% could persist in the sector through 2014.
Development in the retail sector remains tepid overall, yet there are a few large projects of note. The TOWN/Brookhaven project, featuring 550,000 square feet of retail, completed construction during the first quarter and is reportedly near 100% occupancy. Also in Buckhead, the stalled $1.5 billion mixed use Streets of Buckhead project has been renamed Buckhead Atlanta and has a new start under developer Oliver McMillan. Atlanta’s Midtown submarket has also seen more activity, led by mixed-use redevelopments.
Despite high vacancies and emerging new construction, asking and effective rents ticked up slightly in the first quarter and Reis predicts 1% gains for both rates for 2012 as a whole.
To see more trends on the Atlanta commercial property market, visit the Reis Metro and Submarket Reports for Atlanta.
Photo credit: Atlanta Skyline (Photo: Flickr Creative Commons/apple.white2010)