Hotlanta chill

Just about the only good news coming out of Atlanta's apartment market is that it can hardly get much worse.

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The bad news is the market dropped three places down to 42 out of 44 in Marcus & Millichap’s 2010 multifamily National Apartment Index, coming in just ahead of Las Vegas and Jacksonville, Fla. And the worst news is that the market that once was considered a dependable jobs engine is destined for another two percent job loss this year, following a year that marked the worst levels of unemployment in the state since 1990.

But the predicted employment loss of around 4,000 jobs this year, mostly in the first half of 2010, are a mere ripple in the pond compared to last year’s layoff tsunami, when Atlanta employers cut 105,000 jobs from payrolls. The Peachtree State lost 310,000 jobs, or 7.5 percent of its employment base between September 2007 and the end of 2009.

Like the other two markets that hold the bottom spots in Marcus & Millichap’s annual apartment market ranking, Atlanta suffers this year under one of the darkest of the country’s single-family rental shadows and has its own unique challenges to overcome as the Great Recession grinds on. More than two percent of the city’s apartments have been converted to condos since 2003 and many are now part of the rental pool. As of the end of last year, single-family homes available for rent in the metro totaled an additional 0.7 percent of rental inventory.

Even though construction completions of new multifamily product in Atlanta is expected to hit a 15 year low, the supply/demand picture will darken just a little bit more in 2010, as Atlanta’s average apartment vacancy rate is projected to rise 30 basis points to 11.6 percent, following a 100-basis-point drop in occupancy last year.

Toxic banks slow recovery
In his quarterly forecast at the end of 2009, Georgia State University’s Rajeev Dhawan, director of GSU’s economic forecasting center, said even though he sees signs Georgia’s ailing economy is beginning to heal, it will be a long, slow convalescence. He pointed an accusing finger at what he calls the state’s “zombie banks,” and accuses them of slowing the recovery. Those banks have received stimulus funds from the government, but, instead of making loans, are holding onto the money in case of more foreclosures on toxic deals they funded, while good banks are hoarding their wealth to buy the bad ones when they go under, resulting in a dearth of funds to lend to companies that would like to grow and provide new jobs for the unemployed.

With two dozen banks already dead and buried by the end of November and another 40-some under cease-and-desist orders on making new loans, Dhawan says the state is “the Chernobyl of the banking system,” and the zombie banks are the biggest shadow on Georgia’s economic horizon.

He believes recovery in the region depends on cleaning up the zombie banks and the toxic debt created during the boom by the subprime lending that precipitated this economic disaster and Federal Reserve Bank of Atlanta Senior VP and Director Dave Altig echoed Dhawan’s grim assessment of the situation as 2009 came to a close.

Altig said that small businesses with less than 50 employees in the city have been hardest hit by the recession, accounting for 45 percent of its job loss, and he doesn’t expect to see those jobs returning. He has been quoted as saying, “Businesses will have the capacity to expand without new hires, so permanent job loss will continue to be a feature of the economy.”

Atlanta native Mark Vintner, director and senior economist at Wachovia Securities, noted during the Atlanta Apartment Association’s January workshop that, throughout the 10-year housing market boom that ended in 2005, Atlanta led the nation in housing starts, with no builder having more than five percent of the market share, providing plenty of opportunities for growth of small banks and small companies.

When the bubble burst and builders started going under, taking the community banks with them, every industry in the city lost jobs.

Better times ahead
But the city’s apartment association members expect better times ahead in the Athens of the South and the most optimistic say there might even be some rent growth in the back half of 2010.

Dhawan agrees the economic free-fall of the past couple of years is over. And Vintner is among the optimists who proclaim Atlanta already is on the road to recovery, predicting the metro will add some 36,000 jobs this year.

But, Camden Property Trust President Keith Oden cautioned, in his Q4 2009 earnings call introductory comments, that providing guidance in today’s business climate is fraught with peril. “Last year, our guidance assumed a nasty recession with a loss of two million jobs nationally. As it turned out, we lost that many jobs in the first quarter, on our way to five million jobs lost for the year,” Oden said.

But, according to its traditional quarterly grading system for its markets, the 25-year-old apartment company that, as of year-end 2009, owned and operated 63,286 units in 183 apartment communities from coast to coast, is a bit more bullish on the Peach Tree State’s capital than Marcus & Millichap.

With relatively large footprints in all three of the markets at the bottom of Marcus & Millichap’s list, Camden gave Atlanta a C grade with an improving outlook, in line with ratings for Austin, Raleigh, Charlotte and Florida. “With a projected 18,000 new jobs and finally some relief on the supply front with only 2,900 completions, we look for revenue declines below what we experienced last year,” said Oden of the market where the REIT’s portfolio included four apartment communities within Atlanta city limits and another six in the city’s close-in suburbs, totaling 3,202 units, where the average occupancy was 93 percent as of the end of last year, down 0.3 percent from the end of 2008, which was down 0.6 percent from 2007 occupancy levels.

Equity Residential CEO David Neithercut’s forecast for Atlanta was more in line with Marcus & Millichap’s expectations. The 5,979 same-store Atlanta portfolio of the country’s largest apartment REIT generated 3.5 percent of the company’s Q4 2009 NOI, contrasting sharply with the 9.9 percent generated in Q4 2009 by its 6,247 same-store New York Metro apartments. The REIT has no Las Vegas assets, having exited that market around five years ago and ranks its 3,711 same-store portfolio in Jacksonville, Fla., 17th on the NOI production list, at two percent of the company’s NOI last year, but put Atlanta into the same basket as couple of former star West Coast markets.

EQR’s NOI from Atlanta dipped to 6.3 percent by the end of last year, compared to Q4 2008, and the average rental rate declined the same percentage, while the REIT’s average occupancy rose four percent over the same period.

Predicting D.C. and Boston will provide the biggest upside for the company in 2010, along with South Florida, Neithercut told the audience at a round-table discussion at the Citi 2010 Global Property CEO Conference in early March that Seattle, San Francisco and Atlanta will be the most challenging markets this year.