Rethinking Atlanta

 For most metros across the U.S., today's dismal apartment market performances look like bumps along a road that will lead to stronger fundamentals over the coming few years. Throughout Texas, for instance, it's hard to envision a scenario where job production doesn't crank up again during the next economic cycle, attracting additional households that will absorb the glut of apartments seen now. Diverse markets like the Bay Area, Denver and Boston, too, are examples of spots where debate about the outlook mainly just centers on the likely timing of the comeback.

Even some of the nation's apartment markets that rank among the worst performers at present simply are coping with punctured bubbles that don't seem to have permanently derailed them from long-term trends. For all its current troubles, Phoenix very well could add more jobs than any other metro across the nation during the next decade, and the resulting additional residents eventually will fill up the metro's vast excess housing inventory. In the Inland Empire, as well, the economic and demographic trends still point to a favorable future performance.

But there are other locations where it's appropriate to wonder whether long-term history actually tells us much of anything about the future. Maybe recent difficulties mark a tipping point setting the metro on its way to a role in the overall U.S. picture that's quite different from the position seen in the past.

Atlanta is one of the key markets where predicting the future is especially complicated.

If you list the characteristics that made Atlanta an attractive apartment market in the 1970s, 1980s and 1990s, factors near the top of the list would include its appeal as a vibrant lifestyle destination offering lots of job opportunities for young adults just starting their careers. Indeed, Atlanta was regarded as the place to be for new college graduates coming out of schools all across the Southeast during the last decades of the past century. But now, is there really something that makes the Southeast's new grads want to head to Atlanta rather than Charlotte or Raleigh or even Orlando?

Those other options sure outperformed Atlanta on the job production front during the past decade. Bureau of Labor Statistics figures show that Orlando gained more than 93,000 jobs start-to-finish during the 2000s, expanding by roughly 10 percent. In Raleigh/Durham, the job count jumped by 84,000 positions, growing by 12 percent. And Charlotte generated 47,000 jobs during the decade, boosting the total count by 6 percent. Atlanta, on the other hand, actually lost 25,000 jobs from the beginning of 2000 to the end of 2009, after having created more than 700,000 jobs during the course of the 1990s.

Housing developers, sure that Atlanta's economy would take off again at any moment, took way too long to rein in construction. MPF Research records show that about 101,000 apartments were built in Atlanta during the 2000s. And permit volumes point to the addition of 419,000 single-family homes. Today, then, with the job count basically identical to the number seen a decade ago, Atlanta has about a half million more housing units.

That relationship between job production and housing stock growth goes a long way in explaining why Atlanta's median single-family home price is only $124,800, according to the National Association of Realtors. Furthermore, MPF Research figures show average monthly rent for apartments at a mere $777, stunningly just $2 more than the norm recorded 10 years ago.

Some economists are calling for Atlanta's employment growth pace to get back to glory days levels of 100,000+ jobs annually a couple of years from now. That's certainly not impossible, but you should realize that the downside risk of the metro underperforming those expectations looks enormous.

Atlanta's challenges through the next economic cycle look particularly pronounced in the first-ring suburbs, and about a third of the metro's total apartment stock is found in the northern arc that stretches from Cobb County through the Alpharetta and Roswell areas and on into Gwinnett County. If the metro's job production pace proves robust moving ahead, those locales look incredibly vulnerable to losing apartment renters to the purchase of fairly affordable single-family homes. Conversely, if the economy doesn't do well, the stock of for-lease single-family homes offered at prices comparable to apartment rents will remain huge. In another factor to consider when predicting the outlook there, much of the single-family home stock is from the 1970s and 1980s, and the Baby Boomers who fueled the growth in the northern arc are approaching retirement age and asset disposition mode. Thus, even after burning off today's excess housing availability, a slew of additional choices could be on the way.

So what does this all mean? MPF Research certainly isn't saying that Atlanta's apartment market won't recover over the next few years. Indeed, our base-level forecast for apartment revenue shift in the metro looks a lot like our average expectations for the nation as a whole. But the range of possible outcomes in Atlanta is very wide, and the list of things that could go wrong remains quite lengthy.

Market Dynamics is an examination of key influences on the apartment industry by MPF Research, the industry's most trusted source of apartment market intelligence. To receive the latest Market Dynamics newsletter in your e-mail inbox, please click here to subscribe.