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ApartmentResearch

M A R K E T R E P O RT
Atlanta Metro Area Fourth Quarter 2011

Low Prices Create Unique Opportunities, Stir Investors


Despite a relatively soft job market, the apartment vacancy rate in Atlanta continues to decline and property owners are imposing modest rent increases. In fact, the vacancy rate remains on track to fall to its lowest in three years in 2011 and will fall further next year as demand intensifies. Thus far in the recovery, modest demand growth has had a magnified effect on the vacancy rate, as construction of new rentals has been restrained. Additional new units came online in the third quarter and more are on the way in the fourth, but completions this year will be the lowest in the last 10 years. The prospect of an extended lull in construction persists, and will likely extend well into the second half of 2012. A spike in multifamily permit issuance over the last year indicates an uptick in construction. Completions next year will still come in well below the average of 5,700 units delivered annually over the past decade. With property operations improving, the local investment market continues to heat up. Persistent institutional interest in the metros large, Class A complexes, especially those built in the past 20 years, are pushing many private investors to stabilized Class B product. Cap rates for this class of product average in the mid-7-percent range, but intensifying interest among buyers has started to compress first-year returns. Besides institutions, local private capital also remains active in the market. In addition, the recent reduction in prices and greater access to financing are attracting out-of-state money. Owners of properties in secondary markets in particular should find strong, well-located assets in Atlanta and have an opportunity to establish a foothold in a major market. Finally, sales of distressed properties are representing a significant portion of transactions. The significant surge in velocity over the past year has provided substantial transparency on values, encouraging more lenders to list their troubled assets for sale.

2011 Annual Apartment Forecast


0.1% increase in total employment

Employment: A tempered pace of hiring in the private sector will underpin the addition of 2,400 jobs in the metro this year, marking an increase in total employment of only 0.1 percent. Local employers trimmed 7,200 jobs from payrolls last year.

2,000 units will be completed

Construction: Developers will complete 2,000 units in 2011, one year after more than 4,600 new rentals were brought online. More than 600 units remain under construction and slated for delivery in 2012.

130 basis point decrease in vacancy

Vacancy: Steady demand growth and a minimal increase in rental stock will generate a 130-basispoint drop in vacancy in 2011 to 8.5 percent. The vacancy rate in the metro fell 190 basis points last year.

2.3% increase in asking rents

Rents: Asking rents will rise 2.3 percent to $846 per month in 2011, accompanied by a 2.7 percent jump in effective rents to $762 per month. Both rates of increase mark an improvement from last year, when asking rents advanced 0.2 percent and effective rents gained 1.1 percent.

Employment Trends
6%
Year-over-Year Change Metro Area United States

Employment trends remain weak in the Atlanta metro. Year to date through the third quarter, 5,000 jobs have been eliminated. An uptick in private-sector job creVacancy Rate Trends Metro Area 13%ation was offset by a loss of 7,200 government jobs.

Economy

United States

3% 0%
Vacancy Rate

11%Driven

Employment Trends
-3% 6% -6% 3% 07
Metro Area United States

by a gain of 12,400 professional and business services jobs, private-sector employers added 2,200 positions in the first nine months of this year. Several sectors 9%continue to contract, however. Financial activities employment, for example, has declined by 9,800 workers this year, partly reflecting the effects of bank closures. Vacancy Rate Trends
7% 13%
Metro Area

Number of Units (thousands) Median Existing Home Price (Y-O-Y Chg.) Number of Units (thousands) Median Existing Home Price (Y-O-Y Chg.) Year-over-Year Change Number of Units (thousands) Median Existing Home Price (Y-O-Y Chg.) Year-over-Year Change

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

0%

Sources: Marcus & Millichap Research Services, Reis

Vacancy Rate

08

09

10

11*

United The federal, state andStates government sectors each shed jobs during the first three local 5%quarters. At the state level, job cuts affected 2,600 workers, while local governments 11% 07 08 09 10 11* across the metro eliminated 3,000 positions. * Forecast

9%

-3% 6% 8% -6% 3% 0% 07

Employment Trends Home Price Trends


Metro Area Metro Area United States United States

7% through 13% 6%

Outlook: Total employment in the metro will expand only 0.1 percent this year Vacancy Rate Trends Rent Trends the addition of 2,400 jobs. In 2010, local employers cut 7,200 jobs. Metro Area
Asking Rent United States Effective Rent

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

0% -8%

-3% -16% 8% -6% -24% 0% 07 07

Home Price Trends


Metro Area United States

Year-over-Year Change Vacancy Rate

* Forecast Sources: Marcus & Millichap Research Services, Reis

Sales of distressed residences contributed to a 6 percent decline in the median price 9% 0%of an existing single-family home to $102,000 over the 12 months ending in the third quarter. The current median price is more than 40 percent less than the peak Rent Trends 7% Asking Rent -3%level reached more than five years ago. 6%
Effective Rent

5% Housing and 09 Demographics 11% 08 10 11* 3% 07

* Forecast * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, BLS, Economy.com Sources: Marcus & Millichap Research Services, Economy.com, NAR

08 08

09 09

10 10

11*11*

Median Price per Unit (thousands) Median Price per Unit (thousands) Year-over-Year Change Median Price per Unit (thousands) Year-over-Year Change

-8%

* Forecast * Forecast Sources: Marcus & Millichap Research Services, Sources: Marcus & Millichap Research Services, ReisReis

5% 3% -6%Tighter mortgage underwriting and concerns over the direction of the economy con07 07 08 08 09 09 10 10 11*11*

tinue to suppress the number of sales of existing single-family homes. Over the past year, transaction velocity decreased 6 percent. 0%

-16% 16 8% -24% 07 12 0%
-8% 8

Home Price Trends Construction Trends


Metro Area Apartment Completions United States Multifamily Permits

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

Sales Trends The monthly Rent Trends mortgage payment on the median-priced home is $130 less than the Asking Rent 6% $80 average monthly rent for a Class B/C apartment. Many households in lower-tier Effective Rent apartments, however, remain unlikely to shift to owner-occupied housing due to low -6% 3% 08 09 10 11* $60 07 growth and strained household budgets. wage * Forecast
-3%

Sources: Marcus & Millichap Research Services, Reis

0% $40

Construction Trends
-16% 4 16 0 -24% 12 0707
Apartment Completions Multifamily Permits

Outlook: The probability of a further decline in the median price of a single-family Sales Trends home will delay the decision to purchase by prospective first-time buyers, thereby -3% $20 $80 extending the tenure of many current renters.
-6% $0 $60 10 10 11* 11*

08 08

09 09

10 10

11* 11*

* Forecast 12-Month Period * Trailing Sources: Marcus & Millichap Research Services, U.S. Census Bureau Sources: Marcus & Millichap Research Services, Economy.com, NAR

* Forecast * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

07 08 07 08 Construction0909

Approximately $40
$80

4 16 0 12 07

Construction Trends
Apartment Completions Multifamily Permits

1,600 rentals were put into service during the 12 months ending in the third quarter. Developers brought online nearly 1,400 units in the third quarter Sales Trends following a relatively quiet first half of 2011. $20

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

8 4 0

The 306-unit Avonlea Tributary in Lithia Springs remains under construction and $0 08 09 10 11* $60 07 on track Periodcompletion in the fourth quarter, completing the projects scheduled for * Trailing 12-Month for Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA delivery in 2011. Three projects containing an aggregate 900 units started construc$40 tion in the third quarter, with delivery dates penciled in for after 2011.

07

08

09

10

11*

Multifamily permit issuance rose 31 percent during the year ending in the third quarter to 1,800 units. In total, about 13,200 rentals are planned in the metro. $0
07 08 09 10 11*

$20

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

* Trailing 12-Month Period

Outlook: Developers will complete 2,000 units in 2011. Last year, more than 4,600 new rentals were brought online.

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Marcus & Millichap

Apartment Research Report

Vacancy

Vacancy inched down in the third quarter, but a considerable disparity between difEmployment all properties was ferent classes of apartments persists. Overall, the vacancy rate for Trends Metro Area 8.6 percent in the period, marking a drop 6% 20 basis points from midyear. of United States
Year-over-Year Change Vacancy Rate

Vacancy Rate Trends


13% 11% 9%
Metro Area United States

3% Class A vacancy was unchanged in the third quarter at 6.8 percent as demand and additions to supply offset. Year to date, occupancy of an additional 3,500 units has 0% slashed vacancy at top-tier properties 130 basis points.

Number of Units (thousands) Median (Y-O-Y Existing Home Price (Y-O-Y Chg.) Year-over-Year Change Number of Units (thousands) Existing Home Price MedianChg.) Number of Units (thousands) Median Existing Home Price (Y-O-Y Chg.) Year-over-Year Change

Vacancy Rate

Employment Trends -3% Class B/C vacancy decreased 20 basis points in the third quarterArea10.6 percent, the Metro to 6% United States thirteenth consecutive quarter of a double-digit vacancy rate. However, the vacancy -6% rate has decreased 120 basis points over the first nine months of 2011 on net absorp3% 07 08 09 10 11* * Forecast tion of nearly 1,300 units. Sources: Marcus & Millichap Research Services, BLS, Economy.com
0%

7% 13% 5% 11% 07 9%

Vacancy Rate Trends


Metro Area United States

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

Outlook: Steady demand growth will support a 130-basis-point decline in vacancy Home Price Trends Employment Trends this year to 8.5 percent. The vacancy rate was 8.2 percent at Metrostart of the recession. the Area -3% Metro Area 6%
8%
United States United States

7% 13% 6% 5% 11% 07 3% 9% 0%

Rent Rate Trends VacancyTrends


Asking Rent Metro Area Effective States United Rent

-6% 3%07 0%

08

09

10

11*

Year-over-Year Change Vacancy Rate

Rents

* * Forecast Trailing was primarily driven by The gain in asking rents in the third quarter 12-Month&Period Research Services,an increase of Sources: Marcus & Millichap Research Services, BLS, Economy.com Economy.com, NAR Sources: Marcus Millichap 0.6 percent in the Class A segment to $956 per month. In the markets lower-tier -8% properties, asking rents rose 0.4 percent from July to September to $710 per month. Construction Trends Home Price Trends

08 08

09 09

10 10

11* 11*

Median Price per Unit (thousands) Price per Unit (thousands) Year-over-Year Change Median Median Price per Unit (thousands) Year-over-Year Change

* Forecast As a result of a 0.6 percent increase in the third quarter to $839 per month, asking Sources: Marcus & Millichap Research Services, BLS, Economy.com -8% rents have risen 1.5 percent so far this year.0% Effective rents surged 0.8 percent in the third quarter to $755 per month and have gained 1.8 percent since the end of last Home Price Trends -3% -16% year. In the preceding nine months, asking8% effective rents advanced 0.1 percent and Metro Area United States and 0.7 percent, respectively.

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

7% -3% 6% 5% -6% 3% 07 07 0%

Rent Trends
Asking Rent Effective Rent

-6% -24% 0% 07 07

08 08

09 09

10 10

11* 11*

* Forecast * Forecast Sources: Marcus && Millichap Research Services, Reis Sources: Marcus Millichap Research Services, Reis

The improvement in tenant demand has enabled many property owners to cut leasing incentives. Concessions in the third quarter was 10 percent of asking rents, mark-24% 12 07 0% 08 09 10 11* ing a decline of 30 basis points year to date and 40 basis points from one year ago. * Trailing 12-Month Period
Sources: Marcus & Millichap Research Services, Economy.com, NAR

-16% 8% 16

Apartment Completions Metro Area Multifamily Permits United States

-3% 6% $80 -6% 3%07 $60 0% $40

Sales Trends Rent Trends


Asking Rent Effective Rent

08

09

10

11*

Outlook: In 2011, asking rents will rise 2.3 percent to $846 per month, while effecConstruction Trends tive rents will increase 2.7 percent to $762-16% month. Apartment Completions per 4
16
Multifamily Permits

8 -8%

* Forecast Sources: Marcus & Millichap Research Services, Reis

$20 -3% $80 $0 -6% $60 07 07 $40 $20 $80 $0 $60 $40 $20 $0 07

Sales Trends

Sales Trends**

* * Trailing 12-Month Period in activity across all price Forecast an increase The thawing of the credit markets supportedMarcus & Millichap Research Services, U.S. Census Bureau Sources: Marcus & Millichap Research Services, Economy.com, NAR Sources: points over the past 12 months. During the period, transaction velocity surged more 8 than 80 percent. Construction Trends

0 -24% 12 07 07

08 08

09

10 10

11* 11*

* * Forecast Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA Sources: Marcus & Millichap Research Services, Reis

0808

09

10 10

11* 11*

In addition to greater access to credit, lower prices also contributed to the increase in velocity. During the past 12 months, the0median price of properties sold fell 13 12 07 08 09 10 11* percent to $32,000 per unit. * Forecast
Sources: Marcus & Millichap Research Services, U.S. Census Bureau

4 16

Sales Trends

Apartment Completions Multifamily Permits

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Low interest rates are sustaining a relatively low range of cap rates. Large, institutional-grade properties trade at cap rates of 6.5 percent or less, a level lower than 4 that recorded earlier this year. Class B properties generally start to trade in the mid7-percent range. 0
07 08 09 10

11*

07

08

09

10

11*

Outlook: Recent reductions in prices will enable many prospective investors to compete for large complexes with 150 or more units. Institutions may also utilize their strong capital positions and access to financing to become more active in the $5 million to $10 million price range. Generally, intensifying interest in properties and an expanding pool of investors will place pressure on prices in the months ahead, adding greater urgency to close deals.
u

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

** Data reflect a full 12-month period, calculated on a trailing 12-month basis by quarter.

Marcus & Millichap

Apartment Research Report

page 3

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com or call:

Increased Fed intervention, such as Operation Twist, should keep interest rates relatively low through the end of the year. As of late-October, the yield on the 10-year Treasury was hovering around 2.3 percent, approximately 175 basis points below the 10-year average. Apartment mortgage originations more than doubled in the first half of 2011 when compared with the same period last year, driven largely by agency lenders Fannie Mae and Freddie Mac, life insurance companies and local/regional banks. While agency originations increased over past year, the re-emergence of life companies and banks caused their market share to drop from 62 percent in 2010 to 44 percent in the first half. Lenders view apartments as preferred assets and are moving down the quality chain to finance Class B properties in strong locations, encouraged by healthy occupancy gains and firming values. Nonetheless, financing lower-tier properties in secondary and tertiary markets remains a challenge. Portfolio lenders generally originate new loans at 55 percent to 75 percent LTVs, while agency lenders provide up to 80 percent leverage on high-quality assets in core metros. All-in rates for $3 million-plus mortgages start around 3.75 percent for a five-year term, with seven-year loans pricing in the low- to mid-4-percent range, and 10-year notes averaging 4.5 percent to 5.0 percent. All-in rates for smaller loans are typically 10 to 25 basis points higher.

John Sebree National Director National Multi Housing Group Tel: (925) 953-1700 john.sebree@marcusmillichap.com

Submarket Overview

Among the projects completed in the third quarter, the 708-unit Rockledge in Marietta was the largest. The project was also the first delivered in the submarket in nearly five years; no additional developments are planned. The greatest potential impact of planned construction lies in the Midtown submarket. In excess of 2,400 rentals are planned in the submarket, an amount equal to nearly 13 percent of existing stock. Investors seeking large, new properties are increasingly shifting their focus to Clayton County, which is located south of the city of Atlanta. The countys rental stock consists of more than 31,000 units, about one-fourth of which were built in the past 10 years.

Prepared and edited by Senior Market Analyst Research Services For information on national apartment trends, contact Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com

Art Gering

John Chang

Regional Manager jleonard@marcusmillichap.com 500 Northpark Town Center 1100 Abernathy Road, N.E. Building 500, Suite 600 Atlanta, Georgia 30328 Tel: (678) 808-2700 Fax: (678) 808-2710 Price: $150 Marcus & Millichap 2010 www.MarcusMillichap.com

John Leonard

Atlanta Office:

Submarket Vacancy Ranking


Rank
1 2 3 4 5 6 7 8 9 10

Submarket
Cherokee County Sandy Springs/Dunwoody Roswell/Alpharetta Smyrna Buckhead South Gwinnett Marietta Midtown North Gwinnett Clayton/Henry

Vacancy Rate
5.1% 5.1% 5.3% 5.8% 6.2% 6.3% 7.0% 7.2% 7.8% 8.4%

Y-O-Y Basis Point Change


-290 -190 -90 -260 -170 -190 -230 -420 -150 -410

Effective Rents
$767 $825 $802 $704 $1,033 $680 $731 $972 $743 $667

Y-O-Y % Change
3.4% 1.1% 1.6% 3.1% 1.3% 0.1% 1.1% 0.6% 3.1% 1.8%

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.