Like apartment markets around the country in the recent period, Atlanta’s has tightened considerably as a result of the combination of robust demand and slow construction. Also as elsewhere, Atlanta is now seeing a rising tide of new development, particularly in core area submarkets (Midtown and Buckhead). “Around Atlanta,” the Atlanta Business Chronicle reported in July, “developers are moving quickly to plan construction of new apartments, meeting what continues to be off-the-charts demand” (characteristics and durability of the current demand trend are described in the Supply and Demand section of this Reis Observer.) The ongoing decline in vacancy, meanwhile, has resulted in the lowest rates seen here in more than a decade. And the moderate rental increases seen in 2010 and 2011 will be followed in 2012 by the highest rates of growth since 2000. Substantial increases in investment activity are indicated.
After peaking at 11.7% in the fourth quarter of 2009, the vacancy rate for the market-rate apartment sector has embarked upon an uninterrupted descent. By the end of 2011 it had returned to levels last seen prior to the recession. By the second quarter of 2012 it was 7.2%, down 30 basis points for the period, down fully 160 year-over-year and the lowest recorded by the firm for this market in more than a decade. While construction is again heating up, deliveries won’t increase until 2013. The current year’s low completion total, accordingly, should result in year-end vacancy notably below 7.0%. Lowest vacancies among major submarkets, meanwhile, are indicated for the intown Buckhead and Midtown submarkets, where development is currently most active (see the Submarkets section).
With demand arising from more than one demographic cohort, both the Class A and B/C sectors have seen notable declines in their rates. The Class A sector, however (host to most new construction) enjoyed the lowest second quarter vacancy at 5.5%. The rate was 20 and 140 basis points higher one and four quarters earlier. At 9.1%, second quarter Class B/C vacancy was down 40 and 190 points over the same time spans. With the possible emergence of new demand-related factors running alongside increasing construction activity, the marked descent in vacancy may slow in the period ahead.
SUPPLY AND DEMAND
A recession-driven decline in construction was well-timed with the surge in demand that emerged in 2010 (and has continued since). Indeed, the return of construction activity commensurate to recent and current demand has been very slow in coming, an effect in large measure of a slow and highly cautious financial sector. Thus the 18,596 units of positive market-rate net absorption seen over the two-year span 2010-2011 nearly tripled same-term new supply. Moreover, only 701 market-rate apartments are expected to complete construction all told in 2012 in only three projects, one of which, with 193 units, had delivered per the date of this report (see Submarkets). The year’s total, meanwhile, would stand as the smallest by far ever recorded by Reis for this market in more than 30 years of coverage.
The building slump, however, has come to an end. Reis’ end-of-July report on individual construction projects cites 2,154 market-rate units under construction in eight projects metrowide. In addition, notes Marcus & Millichap, projects originally intended for the ownership sector “may increasingly come online as rentals instead.” Indeed, Reis’ second quarter analysis calls for the delivery of nearly 4,066 market-rate apartments all told, next year. And, as described in the Submarkets section, new projects continue to be announced. Data on building permits add additional evidence. According to the U.S. Bureau of the Census, 2,540 multifamily units (including structures as small as five units) were approved for construction in the MSA through the first half of the year, up fully 186.4% from the comparable span of 2011. (While single-family permit numbers also have increased, the rate of growth is not nearly as great. The single-family total, however, is higher.)
The potential challenge posed to demand, accordingly, is obvious. So far this year, with construction completion totals minimal, the issue is not apparent in the data. Thus, the 193 units that completed construction year-to-date metrowide were overwhelmed by 2,429 units of positive net absorption as demand remained robust. Indeed, rental demand has been doubly fortified by the combination of improvement on the economic front and the virtual paralysis in the single-family market that has made home acquisition either infeasible or inadvisable and has kept renters in their apartments even as the high foreclosure rate drives former owners to the rental option. Reports of the death of the single-family market, however, may have been premature. While a robust boom in home buying is not expected any time soon, signs of improvement are apparent. These, along with rising apartment construction totals, could affect the virtually unimpeachable dynamics of supply and demand seen lately in the rental sector.
The shift in the foundations, however, likely will resemble more a small tremor than an earthquake—for the foreseeable term, at any rate. Thus, the Atlanta Business Chronicle notes in a mid-July report, there are still “at least three reasons” that many individuals financially capable of home acquisition will elect to remain in rented units. Financing can be difficult and stiff down payment requirements and tough underwriting standards disqualify numerous potential buyers; uncertainty over the future of home values persists; and Class A apartment amenities and live-work locations make many rental projects highly attractive. In addition, a lifestyle preference favoring rentals over single-family homes is apparent on the part of the “Generation Y” demographic cohort. While the margin between new supply and same-term demand is expected to narrow, Reis, accordingly, expects absorption to maintain a modest advantage in the period ahead.
Notable but less-than-severe losses in average rents fell upon the market in 2009. Measured by the year, however, growth, albeit slow, returned in 2010. Modest improvement followed in 2011. The year 2012, however, is seeing the return of a more robust growth profile. At $868 and $782 per month, second quarter asking and effective averages were up 0.9% and 1.2% for the period alone and were up 1.3% and 2.0% year to date, a stronger performance (on the effective side) than was seen in all of 2011. If the forecast holds, the gains of 3.1% and 4.4% projected, respectively, for the mean asking and effective rates for 2012 would stand as the highest since 2000. Moreover, no let-up is expected for 2013 or after.
Despite differing occupancy levels, as described, the Class A and B/C segments have enjoyed similar rates of growth in their average asking rents year-to-date. At $988 and $732, second quarter 2012 averages were up 1.0% and 1.2%, respectively, year to date. Landlords, notes Marcus & Millichap in a second quarter report on the local market, will continue to pare concessions in the period ahead. “Concessions,” predicts this source, “will average 9.1% of asking rents at year end, down from 10% one year ago.”