Apartment vacancy in the Atlanta metro area has begun to recede, but at 11.4%, the rate remains 330 basis points higher than pre-recession levels. Since 2007, rents have declined as well, further eroding NO Is and resulting in a growing amount of distress for local property owners. As of Q3, apartments account for the largest share of distressed dollar volume in the Atlanta metro area, which should translate into some strong acquisition opportunities for investors as fundamentals recover.

Interest in stabilized lender-owned properties remains particularly high, and several sales have already occurred. Prices for these deals generally start below replacement cost at less than $40,000 per unit, with cap rates varying from 8.5% to 9%. Assets with deferred maintenance or high vacancy also continue to attract interest due to opportunities to strengthen performance in the quarters ahead, but cap rates typically will begin above 9%. While the expected improvement in occupancy and rents will bolster NOIs, additions of competitive stock will slow through the remainder of this year and into 2011.

A rapidly thinning construction pipeline will support stabilization of the Atlanta retail market in the quarters ahead and will set the stage for a recovery in vacancy and rents when space demand improves next year. Vacancy remains high, though, especially among properties delivered during the past 12 months. but the rate has started to level off. A modest increase in occupied space in the first half of 2010 indicates that reduced rents have drawn some retailers into the market, enabling them to open cost-effective locations at previously unavailable sites. More lenders have begun to list distressed shopping-center properties in the Atlanta metro area, a trend likely to persist over the remainder of this year. So far, even vacant retail assets have attracted interest from local buyers, although prices must be approximately $40 per square foot for deals to occur. Distressed sales will likely continue to appeal mostly to local private investors, since the majority of the retail properties classified as REO as of the third quarter are relatively small, with an average size of approximately 33,000 square feet.

Office property operations have continued to soften this year due to the completion of substantially vacant properties in the urban core and continuing business closures and tenant downsizings. Properties scheduled for delivery this year broke ground during better economic times but will expand office stock by a significant 1.9% at a time when demand remains slack and vacancy already exceeds 20%. While gradual strengthening in the local economy will lead to 7,700 new office jobs by year end, many of these positions will fill underutilized space before tenants contemplate enlarging their footprints.Efforts by property owners to fill vacancies as demand improves and leases roll over will sustain the downward trend for rents, placing additional pressure on NOls and contributing to more distress in the local market. Although fundamentals will remain weak for several more quarters, prices have likely neared the bottom. As a result, investors seeking discounted value-add opportunities ahead of a robust recovery likely will step up activity in the months ahead. REO volume is also on the rise, and banks will dispose of more reclaimed assets as their balance sheets improve. These lender-owned assets, which may be priced at deep discounts, will present opportunities for aggressive investors to enhance value through the employment of retenanting strategies, including steep rent cuts.

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