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ATLANTA-Local apartment development has slowed to less than half the average number of units built each year of the last decade. Yet the same economic slowdown that leads to less construction should also keep occupancy levels within the 90% range through the remainder of this year, according to a research report by Marcus & Millichap.

“A slowdown in development activity and ongoing weakness in the housing market will partially offset softer employment growth in the near term, resulting in only a modest uptick in vacancy,” says John Leonard, regional manager of Marcus & Millichap’s Atlanta office. He notes that increased foreclosures and tighter lending restrictions may keep potential homeowners in the renter pool for a while longer.

Approximately 3,400 new rental units are forecast to be built within the Atlanta market this year, down from 4,200 in 2007, Marcus & Millichap stated in its recently released second-quarter report. Atlanta had been the nation’s leading market for new apartment construction, averaging 7,800 units annually over the past ten years.

Construction activity remains steady, with some 4,400 units now under way and 10,800 units in various planning stages, Marcus & Millichap reports. Buckhead is the most active submarket for apartment development, with 425 units expected to open by the end of this year, increasing inventory by 2.5%.

Average vacancy of rental units throughout metropolitan Atlanta is expected to rise a full percentage point by the end of 2008, to 9.1%, with slowing economic growth off-setting a reduction in new stock, Marcus & Millichap stated. Asking rents are expected to increase 2.4% over the year, to $864 per month, while effective rents should advance 2.3 percent to $775 per month.

One possible note of concern for apartment landlords is that Atlanta area employers are expected to add only 1,000 jobs this year, well below the 37,000 positions created last year, Marcus & Millichap finds. Yet job growth in the leisure and hospitality sector, in which workers tend to rent rather than own homes, has actually grown by 2.6% over the past year to 6,200 jobs.

Increasingly conservative lending standards have contributed to a 26% year-over-year drop in transaction velocity, though the median price of properties sold in the past year increased nearly 10% to $65,500 per unit, Marcus & Millichap reports. Average cap rates vary between 6% and 6.5% for class A properties and 7% to 7.5% for average or lower-grade assets.

Leonard says apartment investors who bought assets before 2004 have likely realized a significant increase in value. “Tighter lending standards and rising interest rates could signal an opportunity to market assets to investors looking for an exit strategy,” he says.

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