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ATLANTA-After being one of the nation’s most beaten-down apartment markets, the metropolitan area absorbed 3,000 units during the second quarter. That’s the first positive absorption recorded locally since late 2007, according to a new report by MPF Research.

While Atlanta is suffering the same types of job losses as many other large cities across the US, the demand for apartments is seen as coming from a shadow market of people who either owned condominiums or rented single-family homes, MPF states. As some of those units have gone into foreclosure, the firm speculates, residents missed the service they got from professionally managed apartment complexes.

“They have returned to the more stable and customer-focused environment found in most apartments,” says Greg Willett, MPF vice president of research. “The sizable rent cuts seen recently also helped to make apartments a more attractive option.”

Asking rents for Atlanta apartments are expected to decline nearly 4% this year to $828 per month, while effective rents are projected to retreat at least 2% to $750 monthly, according to Marcus & Millichap. Vacancy in the market is projected to rise almost a full percentage point to 11.2%.

MPF believes apartment rents will fall another 6% over the next 12 months. “Operators still will feel lots of pain from declining rents,” Willett says.

Despite the positive demand seen in the latest quarter, Atlanta apartments still have a long way to go toward backfilling move-outs from past quarters, MPF states. June’s occupied apartment count remained 5,100 units under the total from mid-2008 and roughly 12,900 below the fall 2006 peak.

Construction of new apartments is expected to total 3,300 units this year after reaching 4,500 units in 2008, Marcus & Millichap states. MPF says additional supply is expected through the first half of 2010, particularly in urban core neighborhoods.

Investment activity in the Atlanta apartment market will be dominated by distressed sales in months to come, says John Leonard, regional manager with Marcus & Millichap. Submarkets such as Stone Mountain, Clarkson and West Atlanta are more susceptible to foreclosures because complexes were bought near the market peak or refinanced under aggressive pro forma assumptions and are now facing vacancy issues.

Cap rates for class A properties are in the mid-7% range, while those for class B and C are ranging between 8.5% and 9%, Leonard says. “Initial yields will continue to rise as buyers seek higher returns to compensate for increased operational risk,” he adds.

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