In Atlanta’s multifamily market, the pipeline is full at least for the next two and a half years, according to John Leonard, regional manager in the Atlanta office of Marcus & Millichap. “This is threatening the existing high-end product already in the market and making it difficult to forecast any kind of lease-up schedule for new product,” says Leonard. He adds, “Concessions are currently averaging $114 per month for new and existing product.”

“The multifamily market in Atlanta is a mixed bag, with ballooning vacancy rates and slow property sales balanced by a strong property market with solid prices,” says David Thomas, broker/owner for RE/MAX Commercial Atlanta.

With the economy remaining soft, the pace of new development within Atlanta’s apartment sector has slowed, says Mike Crawford of Bullock Mannelly Partners. “Corporate cut backs, sluggish job growth and 40-year low mortgage rates have effectively reduced the potential renter pool.”

However, Hans Gant, senior vice president of economic development with the Metro Atlanta Chamber of Commerce, notes that Atlanta has seen a renaissance in terms of in-town housing. “The demand for housing in the business center of the city has led to increased construction,” he says. “Economic growth continues to drive the housing market. As Atlanta continues to be a prime location for economic vitality and growth, we see the demand for housing increase. Atlanta has led the nation in housing permits over the last 10 years because the city has added more than 670,000 new jobs and attracted more than 1 million people during this time period.”

Apartments

“Atlanta’s apartment vacancy rates are higher than the region has seen in a decade, but Atlanta has avoided a massive downturn in apartment values,” says Thomas. The problem, he explains, is that sales of existing apartment communities have stalled out. Thomas has found few properties available on the market at prices that make sense to investors.

Apartment sales are slow due to three primary reasons, explains Thomas. First, vacancy rates are up, causing buyers to see a lower return-on-investment in the short term. High vacancy rates are depressing the price buyers will pay for a complex.

“Regionally, apartments are averaging 90 to 93 percent occupancy rates,” Thomas points out. “In communities that have a large number of units, or are located away from the business centers, occupancies are hovering near 85 percent. These apartments are dangerously close to losing money. Sellers, however, are holding prices firm, believing the economy will rebound eventually, as will apartment rentals.”

Second, and not surprisingly, the lower interest rates available for home mortgages are hurting apartment rentals. People are buying houses or condominiums, taking advantage of historically low interest rates.

According to Thomas, the third reason for sagging apartment sales is the rising costs associated with owning an apartment complex. These fixed costs, such as taxes, utilities and insurance, affect the return a property owner can expect to receive in a transaction.
As of the third quarter 2002, rental rates for one-bedroom units averaged $708 a month, while two-bedroom and three-bedroom units were averaging $813 and $948, respectively.

Condominiums

“As has been the case in some aspects of the real estate market in metro Atlanta, the condominium and multifamily market has been affected by our current economic downturn,” notes Karen McRae, senior vice president and director of relocation with Jenny Pruitt & Associates Realtors. “Sales, as described by one real estate agent, are ‘steady but not brisk.’ The market is somewhat saturated with choices, but the same truisms of price, condition and location determine the length of time currently needed to sell a condo or multifamily home.”

As condos in entry-level price points (under $165,000) remain popular, many new apartment projects are being developed with a condo conversion exit strategy in mind, Crawford adds. Sharp gains in land prices and limited availability have continued to influence vertically oriented developments. “This year it appears that new construction will be of a high-rise nature as three projects totaling more than 900 units, are under construction in the Buckhead submarket alone,” says Crawford.

Buckhead is Atlanta’s premier location, and residential developers have saturated the market with new and converted condo product over the last several years, notes Leonard. Due to the value placed on the Buckhead market over the past several years and the abundance of product, it has become increasingly difficult to sell these high-end units at a profit. With this in mind, The Hanover Company has broken ground recently on a high-rise apartment complex that will consist of 300 units costing more than $40 million to construct. Rents are forecasted above $1.25 per square foot. This project is estimated to deliver at a time when two other projects are in lease-up: 933 Peachtree, which consists of approximately 500 condo and apartment units, and Post Properties’ newest mid-rise Class A property.

Mixed-Use and Multifamily

“With anti-sprawl fervor mounting, mixed-use proposals have been the trend,” notes Crawford. “However, if and when many of these projects will be fully delivered remains undetermined, as the office and retail sectors have experienced growing pains similar to that of apartments recently. Mixed-use projects with apartment components include, but are not limited to, Atlantic Station, Glenwood Park, Milton Park, West Highlands, Atlanta Gas Light and Perimeter Town Center.”

Looking Forward

“In terms of development growth, permitting could begin again for Midtown up through the central perimeter and possibly in Big Creek and Johns Creek in Fulton County if the sewer moratoriums are lifted,” Leonard says. “Cobb County has openly admitted that it does not want any new multifamily development in the county for the time being. Once transportation issues are addressed, which may include a MARTA [Metropolitan Atlanta Rapid Transit Authority] route, development constraints may ease.”

“Returns have gone down and are hovering near the 9 percent range,” Thomas says. “Properties are selling today at this percent cap rate, meaning a buyer can only expect a 9 percent return on his or her investment, given an all-cash sale. Buyers would like to see a higher cap rate, around a 10, providing them a strong return on investment.”

Atlanta’s bend-but-not-break economy should help rejuvenate the market, according to Thomas. He is optimistic about the future and believes all those in the multifamily market with holding power will remain patient — a good virtue, especially now.


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