Economy curbs Atlanta’s commercial property market

When Cousins Properties began construction on a second office tower in its Terminus development in Atlanta, the company chairman figured it would quickly become a tenant magnet, just like its glass and steel sibling.

But within a few months, things got a bit crowded. Another developer decided to build an office tower nearby. Then another. Then two more.

Now, the buildings are part of roughly more than 3 million square feet of new office space scheduled to become available in Atlanta over the next 12 months. That will pile more inventory on a commercial property market facing higher vacancies amid a severe economic downturn and unemployment that hit 9.1 percent in March.

The multiple projects are emblematic of a development rush that gripped Atlanta during the real estate boom and is now giving tenants the upper hand for the first time in years.

“We see people in the market … looking to do deals and get you to take them out of their old space and take advantage of what they see as maybe a once-in-a-lifetime opportunity to screw over a landlord,” says Tom Bell, chairman and chief executive of Atlanta-based Cousins Properties Inc.

Landlord concessions such as free rent and money for renovations are on the rise. And some landlords are even offering to take over a tenant’s current space and sublet it. The enticements have prompted some businesses, such as law firms with space in less expensive locations, to move up to more high-end properties.

“I do see people that are actually in the market trading up, no doubt about it,” Bell says.

Despite the tenant-friendly lease terms to be had, the amount of occupied office space in Atlanta shrank by more than 263,000 square feet in the first three months of this year, although some of that drop was due to Verizon Wireless exiting about 112,000 square feet, according to Grubb & Ellis.

Sales of office properties have slowed to a crawl. Real Capital Analytics, which tracks commercial real estate transactions, shows only one deal that closed this year: The purchase of a 118,000 square-foot medical office space for $26.7 million by Meadows & Ohly LLC.

Yet many properties are on the market, with some sellers offering to lend buyers the money themselves.

Several recent Atlanta listings, including one for a 15,000 square-foot retail space selling for $1.4 million, boasted owner financing available.

Office leasing activity, meanwhile, remains sluggish, although there’s been a pickup in leases for spaces under 10,000 square feet, according to Grubb & Ellis.

Bigger swaths of space have been leased by The Boston Consulting Group Inc., and an Atlanta law firm, both of which leased space at 12th & Midtown, a new 3 million square-foot project that includes hotel, retail and residential space being built by a development group that includes Daniel Corp.

More recently, Firethorn Holdings, a software developer, signed a multiyear lease for 50,000 square feet at Terminus 200. It’s the first lease for the project, but because of the glut of nearby, premium office space, it will take Cousins twice as long to lease the tower’s remaining space and the developer will also have to offer more concessions, Bell says.

“It’s just not going to have the return, at least initially, that we had hoped when we started,” Bell says. “That’s what happens when developers make bad decisions and build right behind one another.”

The combination of new office space and the loss of thousands of jobs this year and last year is expected to drive Atlanta’s office vacancy rates higher, says Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.

“The employment picture has really turned sharply negative and that’s what’s really stressing out commercial real estate throughout all sectors in Atlanta,” he says.

Nadji projects office vacancies, which were around 16 percent last year, to climb around 20 percent by the end of this year. He anticipates a nearly 18 percent jump nationally.

Atlanta’s market for industrial space also has been dampened by the addition of new properties beginning in 2005.

Vacancies climbed to 16 percent last year and are projected to reach 17 percent this year, ahead of the 12.6 percent expected for the U.S., Nadji said.

Some sales are taking place. Stockbridge Real Estate Partners signed contracts to buy at least seven warehouse properties in March, according to Real Capital Analytics.

Some food sector companies, such as The J.M. Smucker Co., have recently been in the market to lease new distribution warehouse space, but overall lease activity is down sharply, says Chip Olsen, senior managing director for CB Richard Ellis in Atlanta.

“It’s going to take several years to fill up what’s there because there’s so much out there,” Olsen says.

Much of the weakness in Atlanta’s commercial property market is concentrated in the retail sector, which has seen tenants from big chains like Linens ‘N Things to small mom and pop stores go out of business. That’s left malls and shopping plazas pocked with empty storefronts.

Retail space defaults have been climbing especially in suburbs and outlying areas that expanded rapidly during the housing boom, says Olsen.

“There are a lot of projects in that area that are distressed and becoming distressed,” he says.

As of the first quarter, there were 135 distressed commercial properties in Atlanta worth about $1.7 billion, according to Real Capital Analytics.

That’s helped push the retail vacancy rate to nearly 10 percent last year and it will likely go above 12 percent by the end of the year, Nadji says. He expects the rate will be just under 11 percent nationally.

Major malls anchored by national retail stores tend to be doing better than the smaller shopping centers.

Several shopping centers are on the market in Atlanta, including the roughly 807,000 square-foot Greenbriar Mall, which is selling for $44 million.

People looking to rent an apartment in Atlanta these days have their pick of prospects, including single-family homes, new apartment buildings and condos offered as rentals by investors or developers who couldn’t find buyers.

Rising unemployment and competition from houses and condos, in particular, drove up the area’s vacancy rate to around 10 percent last year, and it’s expected to rise as high as 12 percent by the end of this year – nearly double the projected 7.7 percent national rate, according to Marcus & Millichap.

The rents tenants paid in the first quarter slipped nearly 1 percent to $761, according to Reis Inc.

Mike Elting, head of Cushman & Wakefield’s Atlanta office, says apartment complex sales dried up in the fourth quarter of 2008 and were very slow in the first quarter of this year. But now, sales are picking up.

“All of a sudden,” Elting says, “our activity is getting a little bit better – half of it foreclosures.”

0
0

NO COMMENTS