Atlanta leads apartment construction market. (Building Blocks).

During the first half of this year, each of the top five metropolitan areas in terms of apartment construction market have experienced a loss in jobs. The three biggest markets (Atlanta, New York and Chicago) also happen to be the three biggest job market decliners. Modest recovery in these economies is occurring, but at some point, the higher vacancy rates will force down apartment construction.

The lag between weakening local economies and rental markets and the slowing of the pipeline on new apartment construction can extend for more than one year. The lags are especially pronounced in markets where the local economy was strong for an extended period of time. Not coincidentally the areas with this healthy economic situation happen to be those in the top five apartment construction areas during the first half of 2002.

Atlanta led all metropolitan areas in new apartment permits during the first half of this year. This marks the third consecutive year that Atlanta has done so. Permits were issued for 8,475 apartment units during the first half of this year (down only 500 units from the same period a year earlier). Strong permit activity occurred despite a weakening local economy and rising rental apartment vacancy rates.

Employment losses are moderating, but in June, the Atlanta metro area employers employed more than 58,000 fewer jobs than one year earlier. Jobs lost in the past year have been broad based with almost all of the private sectors having lower employment. Despite the weakness of the metro area's economy during the past 18 months, Atlanta's low business costs and favorable cost-of-living to income ratio makes it competitive and should drive an above average recovery as the national economy rebounds.

Its apartment market has vacancy rates that now stand above 10 percent. Analysts said they expect that number to reach as high as 13 percent by the end of the year. Investors and lenders in new apartment construction will shy away; and apartment permit activity will moderate.

New York, the second-most active apartment construction market continues to struggle. It is home to the most severe downturn among metro areas in the United States. Total employment in June was down by a staggering 97,000 jobs from the same month a year ago. This is an improvement over the net loss of more than 135,000 jobs that the area suffered last December.

Employment in the business and tourism services sectors took the brunt of economic impact resulting from the September 11 attacks. Those attacks brought a drop in demand for both business and tourism-related services. Losses in the financial sector were most dramatic as displaced employers from in and around the World Trade site in Manhattan moved thousands of lobs outside the metro area.

Local Finance, Insurance and Real Estate (FIRE) sector jobs fell by nearly 7 percent (more than 34,500) during the period. Nationally there was little change in FIRE employment over the period. It can be expected that some of these jobs will return to Manhattan, but others will continue to be lured across the Hudson River to New Jersey. Job losses and employee relocation has led to higher apartment vacancies in New York.

Apartment vacancies in the New York metro area are heading toward 5 percent, the highest level since the mid 1990s. New apartment construction rose 34 percent in the first half of this year to 6,059 units. This was the strongest first half since 1983. The condo/coop segment of the apartment market is still relatively solid, but reports are that there is a marked concession in new rental apartment complexes.

Chicago had the third-most active apartment construction during the first half. It issued permits for 5,083 units--a 4 percent rise compared to the same period in 2001. The vacancy rate is rising in Chicago's historically tight apartment market as a result of a weakened economy. There also is extensive condo product on the market that, combined with very low mortgage interest rates, creates competition for rental apartments.

The rental apartment vacancy rate in Chicago has risen to near 5 percent compared to the less than 2.5 percent level a year ago. Helping drive the rental vacancy rate was the marked job losses in the airline, tourism, manufacturing and high-tech industries in the Chicago metro area. The Chicago metro area lost 67,500 jobs in June. Like New York, this figure was better than that reported in December (98,000). Recovery in the Chicago labor markets is expected to be moderate and should occur for an extended period of time. In turn, apartment construction will moderate.

Orlando (4,644) had the fourth-most active apartment permits market during the first half of this year. This represented a 31 percent increase compared to the same period in 2001. The April 2002 issue of Units included a detailed review of the Orlando market, emphasizing that it suffered from a decline in tourism due to the September 11 attacks. The situation is improving and jobs losses for the year period ending in June were down to 8,300 from 21,200 in December. Orlando has a history of wide swings in apartment construction and was apparently starting toward one of its highs in recent months. Now, rental vacancy rates have moved above 10 percent and rent concessions are widespread. Apartment construction is likely to be truncated.

Houston moved among the top five apartment construction market during the first half of 2002 after a two-year hiatus. It had been among the top three markets in both 1998 and 1999. The 4,195 apartment units receiving permits in the Houston area during the first half showed an increase of 43 percent compared to the same period a year ago. Houston's economy slowed considerably over the past year due to the combination of the weaker national economy and several high-profile cutbacks among its area's major firms.

Its employment levels, however, did not turn negative until February. During June, Houston employers cut 6,100 fewer payrolls than they did a year earlier. Certainly, the collapse of energy trader Enron directly resulted in significant layoffs, but this action has not generally spread to other energy firms. The political uncertainty in the Middle East and modest recovery in the U.S. economy combined to produce higher oil prices, which currently are in the target $25-$27 per barrel, which helps the Houston area's economy. Fundamentals in Houston's metro area apartment market were strong last year and have weakened only slightly. Its rental apartment vacancy at mid-year was about 5.5 percent and should rise to a modest 6 percent by the end of this year.

Apartment Permit Activity
10 Most Active Metro Areas--First Half of the Year

       Rank                              Number of Units

2002   2001   2000   Metro Area          2002   2001   2000

  1      1      1    Atlanta             8475   8975   8721
  2      8      7    New York            6059   4531   4262
  3      5      4    Chicago             5083   4906   4441
  4     11      6    Orlando             4644   3557   4290
  5     15     15    Houston             4195   2934   3108
  6      2     16    Las Vegas           3725   5532   2698
  7      4     10    Washington D.C.     3475   4962   3822
  8     19     21    Miami               3385   2517   1973
  9     13     13    Austin-San Marcos   3130   3172   3644
 10     12     18    Dallas              2959   3434   2295

Rank                       Change 01-02

2002   Metro Area          Units     %

  1    Atlanta              -500    -5.6
  2    New York             1528    33.7
  3    Chicago               177     3.6
  4    Orlando              1087    30.6
  5    Houston              1261    43.0
  6    Las Vegas           -1807   -32.7
  7    Washington D.C.     -1487   -30.0
  8    Miami                 868    34.5
  9    Austin-San Marcos     -42    -1.3
 10    Dallas               -475   -13.8

More detailed data for these markets and a list of the top 50 metro areas can be found at www.naahq.org.