Over the past year, multifamily markets throughout the Southeast have faced a unique set of challenges, including low interest rates, high unemployment and oversupply. Despite the lingering recession, construction of multifamily units has not slowed accordingly — in fact, construction rates are now higher than during the economic boom of the mid- to late-1990s. Thus, supply levels are overly high, rental vacancies are up and absorption is down. While the start of the downturn was largely demand driven, oversupply now poses the main risk to recovery. The national vacancy rate stands at 9.6 percent, up from last year (Torto Wheaton Research). All is not lost, though. According to Torto Wheaton Research’s 2003 forecast for the multifamily market, rent growth is expected to take a positive turn in 40 out of the 53 markets included in the forecast.

How quickly these turnarounds occur depends on the Southeast market in question. For example, Raleigh/Durham, North Carolina, is expected to see negative rent growth in 2003, while Florida markets such as West Palm Beach and Fort Lauderdale will see high absorption rates and comparatively robust rent growth (Torto Wheaton Research). Markets that haven’t been overdeveloped, such as Jacksonville, Florida, may also see growth in 2003.

Atlanta

If oversupply is a concern anywhere in the Southeast, it is in Atlanta. Job growth is stagnant and supply is tapering but not as much as it needs to. “Atlanta is the whipping city nationally and everyone is taking their shots,” says Richard Jordan, a director in the Atlanta office of Holliday Fenoglio Fowler. “The bottom line is we’ve built too much. We’ve built based on adding 50,000 to 75,000 jobs each year, but we lost 62,000 this year.”

“In Atlanta we delivered 15,000 units this year. Development is down but there are still a lot of deals in the pipeline and next year we’re delivering 7,000 units,” says Jordan. “So you have a hangover effect from the economy slamming on the brakes. You plan a deal and it sounded great 18 months ago, but you deliver it to an economy like this and you kind of scratch your head and wish you had a crystal ball. Unfortunately no one’s developed that model yet.”

Although the short-term outlook for Atlanta is somewhat bleak, Jordan says the city’s long-term outlook is much better. “Atlanta is still the capital of the Southeast and people are going to continue to do business and invest here,” he says.

To deal with the seemingly insurmountable short-term problem of oversupply, multifamily developers and managers are coming up with creative solutions. “We’re doing some different things,” says Jerry Durkin of Wood Partners. “We’re delivering a high-rise that was financed to be a rental but which we always understood might be converted to condominiums. If we were delivering it as a rental, we would be discounting the rents pretty meaningfully.”

Wood Partners is in the process of completing the 498-unit high-rise, The Metropolis, in Atlanta’s Midtown submarket. The project, which consists of two 14-story towers, also includes 40,000 square feet of retail space and five floors of parking. The first tower is 80 percent sold and Wood Partners is contemplating whether to lease or sell the second tower.

“We’re doing well on the condominium conversion side in Atlanta,” says Durkin. But, he clarifies that this particular conversion works because of the submarket it is in. “We’re going to do conversions where it makes sense. You have to make sure that you are doing them for the right reasons at the right time.”

As such, Wood Partners has a diverse portfolio of developments in Atlanta. The company is wrapping construction on an approximately 260-unit apartment community, Alta West, in Atlanta’s Howell Mill submarket. The company also just closed financing for and is ready to break ground on an affordable housing project on Martin Luther King Jr. Drive.

With rock bottom interest rates, multifamily developers are seeing a rapid increase in the number of former renters who now want to own homes. Atlanta is no exception. Landlords are offering concessions to lure renters to their complexes. Class A properties continue to do well because most of their tenants are renters-by-choice. “Properties seeing the concession pain and the reduced quality in tenant are the B+ to B assets,” says John Brown, senior managing director of Insignia/ ESG. Since the renters of these apartments make up a sizable portion of the population that has considered buying a home in the past 12 months, “those multifamily owners and property managers have had to be more creative and more accepting of the tenants they receive,” says Brown.

Of course, a blanket statement cannot really be made about any metropolitan market as a whole, considering the crucial role that submarkets play. While Atlanta submarkets like Gwinnett County are perceived as soft, markets like Buckhead and Midtown are faring better. “You feel safer doing an in-fill location in areas where housing is more expensive. So if you’re in Buckhead or Midtown where housing is not affordable, you’re not necessarily competing against homes, you’re competing against very affordable condominiums,” says Jordan.

“There are a lot of submarkets that lenders will not even touch,” says Herb Chase, senior managing director of Insignia/ESG. “But there are lenders that will lend for those markets if the developers offer strong guarantees. Overall, the lenders have become more strict in their underwriting requirements for construction lending. There are submarkets in the major markets that you can be comfortable lending in and other submarkets within that city that you would want nothing to do with.” As for Atlanta, he says, “There are some good opportunities within the Atlanta submarkets and people are taking advantage of those.”

Atlanta’s multifamily recovery is contingent on numerous factors, the most important of which are job growth and absorption of excess development. Says Jordan, “Capital is tightening, which is drying up the development pipeline, which means there will be very little development in 2004. Hopefully we’ll absorb everything we’ve delivered and then, guess what? We’re going gangbusters again.”

Washington, D.C.

Although 2002 was a difficult year for the Washington, D.C., multifamily market, the city’s outlook for 2003 is comparatively sunny. Job growth was slightly positive last year and unemployment rates are among the lowest in country. Says Chip Bay, Trammell Crow Residential’s Washington, D.C., city partner, “2002 was a tough year in terms of the market itself. Right now we are just burning through a lot of product that is under construction, mostly in Northern Virginia, and looking forward to some significant job creation, which will help absorb some of this product.” Another obstacle is the low interest and mortgage rates that have eaten into the D.C. renter’s market. “There’s still a pretty significant demand for new homes, particularly at the lower end of the price spectrum,” says Bay.

Still, the market is weathering the storm much better than most. “If you talk to most institutional investors, they will tell you that there are three or four markets in the country that they want to be in, and D.C. is one of them,” Bay continues. “Fundamentally, we’ve got the federal government behind us so there’s always a certain amount of job growth in any given year that keeps us afloat. We also have barriers to entry. We have our parameters that keep us from getting too high and too low.”

Trammell Crow Residential is optimistic. The D.C. office is currently constructing Alexan Reston Towne Center, a 698-unit project located in the D.C. suburb of Reston, Virginia. Apartments make up 365 of the units and 333 are condos. The project, which is scheduled for completion in the second quarter of 2004, also has 4,000 square feet of retail space that will be used by a non-profit art gallery.

In a joint venture with The Olayan Group, Trammell Crow Residential is also developing Alexan Fairfax Ridge, a luxury community located in western Fairfax County. The community will have 420 rental apartments in 11 low- to mid-rise garden-style buildings. The first apartments will be ready for occupancy in March.

Florida

Compared to the rest of the Southeast, even the rest of the nation, the multifamily market in Florida, particularly South Florida, is thriving. The Orlando office of Wood Partners, which has eight offices throughout the Southeast, has completed three multifamily projects over the past year and is constructing a fourth project in Orlando right now. Wood Partner’s Boca Raton office has five projects under construction in Palm Beach County. “South Florida is perceived to be the best market in the Southeast and is probably rated in the top three markets in the country in terms of the best opportunity for owning an apartment,” says Insignia/ESG’s Chase. “It has the least amount of concessions, the least amount of rent loss and the job situation is pretty good.”

The Sunshine State’s multifamily market is not without its problems, however. “I would say in Florida, more so than anywhere else, single-family developers are trying to buy the land that my competitors and I want to buy,” says Durkin. “The for-sale market is simply on fire in most, if not all, of the state.” Nevertheless, home prices in the state are comparatively high, which has provided some protection for multifamily developers. The strong barriers to entry in South Florida have provided protection from oversupply.

Extensive “starter home” construction, low interest rates and relaxed underwriting requirements have caused a dearth in the primary renter population throughout the Southeast. Markets where multifamily development has not slowed in accordance with job losses are reaping the effects of that now. Markets, such as Atlanta, Charlotte and Raleigh, with the lowest price ratios between home mortgages and rents have been hit the hardest, while urban areas, like South Florida, with expensive homes and high barriers to entry, have weathered the storm relatively well.

Southeast markets that have previously seen little to moderate development, such as Birmingham, Alabama, and Knoxville, Tennessee, may be the ones to watch this year and next. Or, says Jordan, “go ahead and start looking at Atlanta, Tampa and Orlando because they are going to be delivering in 2004 and everybody hopes we’ll be back to normal again — whatever normal is.”

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