Apartment Research

M A R K E T R E P O RT
Atlanta Metro Area Third Quarter 2012

Rents Rise Ahead of New Development Cycle

Solid rental housing demand continues to drive down apartment vacancy and lift rents in the Atlanta metro, but a new cycle of construction looms as builders strive to capitalize on the housing preferences of key population segments. Currently, the dominant trend in the Atlanta market remains the persistent absorption of rental housing, as would-be homeowners remain stymied by stringent mortgage underwriting and recent college graduates form households. Following a decline in the second quarter, marketwide vacancy is more than 100 basis points less than the quarterly average in the three years preceding the recession. However, demand growth is slowing, especially in the Perimeter submarkets, as vacancy tightens and the most desirable properties remain full. As a result, additional decreases in the vacancy rate will be more modest than those recorded over the past year. Rental development, meanwhile, will likely emerge as a more potent factor in 2013 and beyond. Multifamily housing starts are up and permitting is rising. In addition, multifamily units conceived as for-sale in areas such as Buckhead and Midtown may increasingly come online as rentals instead. The rst half of 2012 ended encouragingly for property owners contemplating sales, as transactions surged and the arrival of additional out-of-state investors enlarged the buyer pool. The recovery in property operations has made agency nancing more readily available than one year ago and, overall, qualied borrowers enjoyed broader access to nancing. Class C properties, often selling at per-unit prices of $12,000 or less, remain prevalent, but investors continue to look at stabilized performing properties. In addition to the discount buyers, a sizable institutional presence remains, with cap rates in this segment hovering close to 5 percent. Private investors will increasingly eye Class B properties in the close-in suburbs of Cobb, north Fulton and Gwinnett counties, where cap rates typically start near 7 percent. The pending increase in apartment development will heighten investors awareness of the eects of new supply on properties being considered for purchase in the months ahead.

2012 Annual Apartment Forecast

1.9% increase in total employment

Employment: Total employment in the Atlanta metro will expand 1.9 percent, or by 44,000 jobs, in 2012, marking the third consecutive year of job growth. The most signicant increase in payrolls will occur in the trade, transportation and utilities, and professional and business services sector, while an increase in residential building will support modest construction hiring. Construction: Developers will complete 1,400 units this year, down from roughly 2,000 rentals in 2011. Builders are on track in 2012 to draw permits for 4,700 multifamily units, nearly two times last years total.

1,400 units will be completed

80 basis point decrease in vacancy

Vacancy: Growth in occupied rentals will far exceed a meager level of completions this year, triggering an 80-basis point drop in vacancy to 7.1 percent. The vacancy rate declined 190 basis points last year.

1.9% increase in asking rents

Rents: Metrowide asking rents will rise 1.9 percent this year to $854 per month, improving on a gain of 1.3 percent in 2011. Operators will pare concessions, resulting in a 2.9 percent jump in effective rents to $776 per month in 2012. Eective rents rose 1.6 percent last year.

Economy

Employment Trends
Metro United States

Local employers hired 21,000 workers in the rst half of 2012, lling 14,000 positions in the second quarter alone. Approximately 15,000 jobs were added in the second half of 2011. All of the job growth this year has occurred in the private sector, where 24,500 employees were added. Gains were heavily concentrated in the trade, transportation and utilities sector, as retailers hired 11,000 workers and transportation employers created 3,000 jobs. In addition, 10,800 jobs were added to professional and business services payrolls in the rst half. About 3,500 positions were slashed from government payrolls thus far in 2012. Additional cuts are planned; 133 teachers and administrators jobs will be slashed in DeKalb County, while the Clayton County school board will pare 170 posts. Outlook: Following the gains in the rst half, employers in the Atlanta metro remain on track to add 44,000 positions in 2012. Last year, 33,500 positions were created by local employers.

6%
Year-Over-Year Change

3% 0% -3%

-6%

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Housing and Demographics

Home Price Trends
Metro Median Home Price (Y-O-Y Change) United States

10% 0%

The median price of an existing single-family home in the metro dropped 10 percent over the past year to $90,600. So far this year, bank-owned deals accounted for approximately 40 percent of the existing single-family home transactions, down from about half of all sales in the corresponding period a year ago. Low prices contributed to a 14 percent jump in sales of existing single-family homes from one year ago. In the new home segment, construction started on 6,600 residences over the past year, a 10 percent increase. The average Class A rent is roughly equal to the mortgage payment on a home in the $180,000 range. In addition, the average Class B/C asking rent is $200 more than the monthly mortgage payment on a median-priced home. Outlook: A high level of single-family home aordability partly reects low housing prices in outer areas of the sprawling metro. Single-family homes in desirable core areas, such as east Cobb County or north Fulton County, are generally less aordable, supporting a vibrant rental market in these areas.

-10% -20%

-30%

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09

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Construction Trends
Completions Multifamily Permits

Construction

8
Number of Units (thousands)

The 193-unit Regency at Johns Creek Walk was the only project completed in the rst half of the year. The complex, which is in the Roswell/Alpharetta submarket, was delivered in the second quarter. Over the past 12 months, construction commenced on developments containing 2,000 units, most of which are slated for completion in 2013 and 2014. Also, about 14,000 market-rate rentals are planned, approximately the same number under consideration earlier this year.. In addition to rentals, roughly 200 condominiums are under way and an additional 7,100 are planned. Given the strength of the rental market and the challenges of qualifying for a mortgage, many condominiums may come online and be operated as rentals until the for-sale market normalizes. Outlook: Developers will complete 1,400 market-rate rentals in the metro during 2012, the lowest annual output in more than 12 years.
Marcus & Millichap

4 2 0

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* Forecast ** Through 2Q page 2

Apartment Research Report

Vacancy

Respectably strong demand persisted in the second quarter, driving down marketwide vacancy 20 basis points to 7.2 percent. During the rst half of the year, vacancy fell 70 basis points, marking a slight slowing from the 90-basis point drop posted in the second half of 2011.
Vacancy Rate

Vacancy Rate Trends

Metro United States

14% 11% 8% 5% 2%

Approximately 70 percent of the rentals absorbed in the rst half this year were Class A units. Vigorous demand and limited construction helped push down the Class A rate 80 basis points during the period to 5.3 percent. The Class B/C vacancy rate dipped 50 basis points in the rst six months of 2012 to 9.3 percent and has been less than 10 percent for the past three quarters, the rst such streak in four years. Outlook: Construction will increase in the second half of 2012, but strong demand will support an additional drop in vacancy. For the year, vacancy will decrease 80 basis points to 7.1 percent.

08

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12*

Rents

Average asking rents were up 0.6 percent in the rst half of the year to $843 per month following a 0.4 percent uptick from April to June. Asking rents rose by a similar amount in the nal six months of 2011.
6%
Year-Over-Year Change

Rent Trends
Asking Rent Effective Rent

With a 0.4 percent bump in the second quarter, eective rents have gained 1.1 percent this year to $762 per month. The increase marks an accelerated pace of growth from the second half of 2011, when eective rents gained 0.7 percent. The Class B/C segment led the increase in asking rents in the second quarter, with a 0.6 percent rise to $714 per month. Class A asking rents gained only 0.2 percent to $959 per month and have edged up 0.4 percent year to date. Outlook: Metrowide asking rents will rise 1.9 percent this year to $854 per month, accompanied by an increase in eective rents of 2.9 percent to $776 per month. Concessions will average 9.1 percent of asking rents at year end, down from 10 percent one year ago.

3% 0% -3% -6%

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Sales Trends**

Investors utilized broader access to agency nancing to complete 40 percent more transactions over the past 12 months. Two-thirds of the deals involved assets with 200 or more units. Assets sold in the past 12 months carried a median price of $37,500 per unit, approximately 14 percent more than the median price in the prior year. Although NOIs have risen at many proerties,, the higher median price also reects several sales of large, high-quality properties. Cap rates on institutional properties sit below 6 percent, while most stabilized Class B complexes trade at cap rates in the low- to mid-7 percent range depending on intrinsic demand drivers and property age. Outlook: Demand for multifamily assets will remain intense as the pool of local investors and out-of-state buyers grows larger. Additional cap rate compression could occur at the top of the market, while more modest pressure is applied in the markets Class B properties.
Median Price Per Unit (thousands)

Sales Trends
$80

$60

$40

$20

$0

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* Forecast ** Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics page 3

Marcus & Millichap

Apartment Research Report

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

Visit www.NationalMultiHousingGroup.com or call:

John S. Sebree Director, National Multi Housing Group Tel: (312) 327-5417 john.sebree@marcusmillichap.com

The Federal Reserve recently pledged to sell $267 billion in short-term securities to buy long-term Treasurys in order to maintain low borrowing costs for consumers and businesses to continue to support an economic recovery. The purchases will occur in the second half of 2012 and extend a program known as Operation Twist. The target to keep short-term interest rates low is now late-2014. Pipelines of under way and planned apartment projects are expanding in many metro areas and several major lenders appear willing to underwrite construction on select projects. The primary considerations for lenders include the quality of sponsorship and strong market fundamentals, including low vacancy and rising rents. The potential for elevated development may encourage the GSEs to underwrite acquisitions more conservatively in markets with large pipelines. In many metros, however, the agencies will underwrite deals at up to 80 percent LTV and rates 200 to 250 basis points above the 10-year U.S. Treasury. Life companies, meanwhile, are also active in the Class A arena, oering rates that are competitive with the GSEs. Commercial banks generally oer shorter-term nancing for acquisitions from $1 million to $5 million at interest rates starting in the low-3 percent range for threeyear terms and up to 4.5 percent for seven-year loans. In the growing CMBS market, looming issuance of several billion dollars in the next few months will arm spreads for AAA bonds and establish investor appetites for B-rated tranches.

Submarket Overview

In addition to market-rate rentals and condominiums, the 217-unit Lofts of Kennesaw student housing project in Marietta is under construction. The project is slated to open in time for the fall semester this year. Access to interstate highways continues to burnish the appeal of rental housing in the Smyrna submarket to renters making daily or frequent commutes to Atlanta. Since reaching its peak level at the end of 2009, vacancy in the submarket has declined more than 400 basis points, including a 30-basis point decline in the spring quarter. In the Roswell/Alpharetta submarket, vacancy ticked down 10 basis points in the second quarter this year, reecting the slight slowing trend in demand growth evident across the metro. Class A vacancy in the submarket sits at 4.1 percent, 30 basis points less than a year ago, while the Class B/C rate has decreased 30 basis points in the past year to 6.8 percent.

Prepared and edited by

Art Gering
Senior Analyst Research Services For information on national apartment trends, contact

John Chang
Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Atlanta Oce:

Submarket Vacancy Ranking

Rank
1 2 3 4 5 6 7 8 9 10

John Leonard
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

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

Vacancy Rate
3.8% 4.4% 4.8% 4.9% 5.0% 5.1% 5.4% 5.7% 6.1% 7.0%

Y-O-Y Basis Point Change

-110 -180 -190 -50 -40 -330 -200 -60 -210 -180

Effective Rents
$756 $714 $1,041 $826 $804 $999 $742 $694 $742 $833

Y-O-Y % Change
-0.7% 2.0% 2.0% 0.8% 0.3% 2.9% 1.9% 1.9% 0.5% 2.0%

Price: $150

Marcus & Millichap 2012 www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every eort 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.