As we struggle through this uncertain economy, decisions about the future become more difficult, and progress is put on hold. In commercial real estate, this translates into delaying new projects, developments coming on line with no tenants to fill them, rising vacancy rates and low absorption. Businesses that were thinking about expanding have decided to stay where they are, and many have been forced to downsize.

The result is suffering office markets. While many are feeling the effects, in their own unique ways, most cities are weathering the storm. New developments are still coming on line, and most industry experts have a cautiously optimistic outlook for 2002 and beyond.

ATLANTA

TrizecHahn Develops Only Buckhead Office Tower This Year Located at 3500 Lenox Road, at the intersection of Highway 400 and the Buckhead Loop in Atlanta, TrizecHahn Corporation's Alliance Center is a 10-acre urban park that will feature three office towers and a residential tower at completion. The first of the towers, One Alliance Center, is the only office tower built in the Buckhead area this year and was 70 percent leased when it came on the market. With a crescent roofline that intersects a rectangular tower to create unique overlook extensions on most floors, One Alliance is a combination of modern design and traditional decorative elements such as granite, marble and wood. Described by TrizecHahn's Southeast regional vice president David Canaday as a "granite and glass building," the twenty-story tower features full-length windows of silver blue reflective glass. Amenities in the 560,000-square-foot building include a meeting room and a fitness center free to tenants. A 10-story parking deck, with four underground levels, is connected to the building by elevators. Security features include a 24-hour manned security desk in the lobby, closed-circuit TV monitoring, and after-hours card-controlled access. Canaday expects the building to be 80 percent leased by the end of this month. The first tenant, ' Corporation, pre-leased 185,000 square feet; other initial leases include 100,000 square feet by Towers Perrin, 68,000 square feet by BBDO Worldwide and 25,700 square feet by EBC Office Centers. Since the building's opening, Kinetic Ventures has leased 2,500 square feet. The city of Atlanta requires that the residential tower be completed before or at the same time as the next office phase; TrizecHahn is working with a residential developer to go forward with the next phase of the project. TrizecHahn, a Canadian corporation with U.S. headquarters in Chicago, manages its U.S. office portfolio of 76 properties totaling 49 million square feet through its subsidiary, TrizecHahn Office Properties Inc. The company worked with local architects Smallwood, Reynolds, Stewart, Stewart & Associates and general contractor Beers Construction Company on the One Alliance Center project. -Jaime Banks

With the highest occupancy rate in Atlanta, downtown continues to be the strongest of all the submarkets, according to Bill Weghorst and Tom Miller of Insignia/ESG. More people are choosing to come back to urban areas. Atlanta has recently experienced an increase in people and businesses moving to suburbs, due in part to expanding businesses. Now many of those companies are downsizing, and businesses are closing their suburban offices.

"Certainly the economy has affected everyone," says Weghorst. "Failing or bankrupt dot-com companies have caused absorption rates to go down."

There has been a considerable slowdown in absorption of office space; right now Atlanta is experiencing the lowest of recent historical lows. There is a tremendous amount of sublease space competing with new buildings, which puts pressure on rental rates. "Over a half million square feet of sublease space is available in downtown," Weghorst notes. "This is actually a good figure; it's worse in other submarkets."

There is currently 4.5 million square feet of office space under construction in Atlanta. Miller and Weghorst cite Midtown as one of the areas where there is a lot of space under construction. Major Midtown projects include Atlanta-based Pope & Land's 500,000-square-foot Atlantic Center Plaza and Holder Properties' Millennium in Midtown, a mixed-use development that includes a 410,000-square-foot office project. Atlanta-based Holder is developing the 14-story technology-oriented facility to accommodate tenants' needs with features such as redundant fiber-optic telecommunication providers, tenant generator pad sites and expanded chases to address special electrical and fiber-optic needs.

In Buckhead, the most recent development is TrizecHahn Corporation's One Alliance Center, a 560,000-square-foot tower that will be part of a 10-acre urban park. The first phase of Lindbergh Center, a 4.8 million-square-foot development along Atlanta's MARTA rail line, is expected to be completed in 2002. Lindbergh Center is a development of Atlanta-based Carter & Associates, the Metropolitan Atlanta Rapid Transit Authority (MARTA), Federal Realty Investment Trust, Post Properties, Harold A. Dawson Company and BellSouth.

Houston-based Hines Interests LP is currently developing the third building in Perimeter Summit, a master-planned mixed-use development on 83 acres in the Central Perimeter market. Brian Realty controls the property. The development is fully zoned for 3.5 million square feet of office and retail space, 500 hotel rooms and 400 luxury apartment units. Perimeter Summit is presently home to Hewlett-Packard's 580,000-square-foot southeastern regional headquarters and 3003 Summit Boulevard, a 400,000-square-foot office building. Hines is currently developing 2002 Summit Boulevard, an 18-story, 390,000-square-foot office tower between the first two buildings. This property is scheduled for completion by the first quarter of 2003. Thompson, Ventulett, Stainback & Associates, Inc. served as project architect.

Additionally, Hines is developing One Overton Park, a 380,000-square-foot building in the 1.45 million-square-foot Overton Park development in the northwest corridor of Atlanta.

Also in the northwest area of the city, at the intersection of Interstates 285 and 75, Charlotte, North Carolina-based Childress Klein Properties is underway with the Galleria 600 office building, an 18-story tower in the Galleria complex. Batson-Cook Construction, headquartered in West Point, Georgia, is general contractor for the 432,000-square-foot project, scheduled for completion in April 2002. It is the fifth office building to be built by Batson-Cook in the Galleria complex.

The events of September 11th have influenced people -- both landlords and tenants -- to stay where they are and ride it out, says Weghorst. As for rental rates, while landlords recognize the slowdown, many are not willing to lower rental rates and be aggressive. "They aren't running in fear of the market weakening," Weghorst explains. "They are waiting for the economy to rise again, which will hopefully happen in the next two or three quarters. Most people are recognizing that the economy is just going through a blip in the radar screen, so to speak -- and they should not panic."

"Most institutional grade owners are figuring that as long as they can keep occupancy levels at 80 percent or higher, they can cover the debt service and ride out the storm," adds Miller.

One reason people are not panicking is because new buildings are being constructed at sizes ranging from 200,000 to 300,000 square feet, not as large as in the 1990s, when buildings were in the 1 million-square-foot range. In recently constructed buildings, one tenant might fill half of the building, which is one reason that developers and building owners are not panicking: because of the smaller size, they are able to fill buildings quicker.

The stall in the office market is directly related to the stall in the economy. "If you're optimistic about the economy going back up in two or three quarters, the office market should do the same. Economic leading indicators are favorable to an economic upturn in the next 12 months, which will lead to job growth, which will lead to absorption," Weghorst explains.

"These things take time," notes Miller. "Even if the economy turns around, it will still take time for the office market to follow -- for businesses to fill existing space. It won't be anything like the early 1990s, but it will still take time."

The downtown Washington, D.C., market is maintaining its strength, unlike many U.S. cities. One reason for this stability is the city's diverse mix of tenants, according to Joe Stettinius, principal and director of leasing with Trammell Crow Company. Government entities, law firms, associations and lobbying groups make up a good portion of Washington tenants. And unlike the decline the telecom market is now experiencing, most tenants in the Washington market are growing.

Margaret Donkerbrook, vice president of Jones Lang LaSalle in Washington, D.C., also maintains that the area's diverse mix of office users has helped the market. "The downside for D.C. was that we didn't see the growth of the tech market; the upside is that we didn't see the downsize of this market when the tech companies fell. We have a diverse mix of office users, and federal employment growth is in our future," she says.

Washington statistics indicate that the market is still fairly strong and remarkably resilient. "I think that the national economy makes people think twice about going spec," Stettinius says. "But in this area, the economy is still pretty strong, at least downtown. Access to the federal government is what's driving our market here, through the presence of corporations, lobbying firms, associations and law firms." The events of the last few months have certainly made Americans mindful of how important the government is. According to Stettinius, the government is now looking for a lot of space that it had not contemplated needing 4 months ago.

Slightly less than 5 million square feet is under construction right now, and about 65 percent is pre-leased, says Stettinius. Notes Donkerbrook, "There has been limited speculative development, but what has come on line is substantially pre-leased."

Significant developments include the recently completed 1399 New York by local developer DRI Partners, Inc. and Kempfer's 1501 K, The Investment Building. This 370,000-square-foot building was 80 percent pre-leased at delivery, according to Bob Schwartz, vice president of leasing and management for Jones Lang LaSalle in D.C. The Cafritz Company is underway with 1725 Eye Street NW, a 10-story, 250,000-square-foot office building.

"The idea of building a spec building in Washington right now is more difficult than it was last year," says Stettinius. "Those who are considering developing a building are probably going to want to have at least a percentage pre-leased before they break ground."

The D.C. experts have a positive outlook for the office market, with vacancies nearing all-time lows. "Demand will probably stabilize a little bit, but we will still have significant positive demand," says Stettinius. "Vacancy rates should continue to fall, particularly in the Class B market. So for the most part, I think that 2002 is going to be a decent year."

Miami

"The outlook for the downtown Miami office market is not a pretty picture in the short run, and not because there was a lot of overbuilding," says Forrest Robinson, director of development services for Codina Group. "What I have observed is that a number of build-to-suits for some pretty significant companies are now becoming spec office buildings because the company is either not going to move in at all, or they're going to use less space than they originally thought they would. So that is putting space back on the market that nobody was really anticipating."

Examples include American Classic Voyages, which recently filed for bankruptcy. The company was the lead tenant for 130,000 square feet in a 240,000-square-foot building that is under construction. That space is now on the market. Lucent Technologies was also underway with a large build-to-suit; now much of Lucent's space is available for lease.

Speculative development has been slowing during the last 6 months, according to Robinson. "But with the events of September 11th, some of the companies that were already in serious situations just couldn't make it. The economy has definitely impacted that segment of the market," he notes.

Third quarter vacancy rates for Miami's CBD were at 9.8 percent, according to Codina Realty Services' Miami-Dade County Office Market Statistics. Year-to-date absorption was 41,163 square feet, and the average asking rental rate was $26.18 per square foot.

The economy has also caused many companies to pause and reevaluate future moves. "Today's economy has companies looking very closely at how they do business," says Robinson. "We work with a lot of partners, and what we're trying to do is look beyond this current situation and ask, 'How do we position them for when the market comes back?' Because it will; it always does." Robinson says Codina addresses issues such as whether to buy land, enter a new market or begin a new product type.

Despite the grim outlook for downtown, the greater Miami area does have some developments that, although not entirely new, are maintaining strength. Jacksonville, Florida-based Flagler Development Company has completed 3.1 million square feet at Beacon Station Business Park, which is strategically located northwest of Miami International Airport. Twenty-eight buildings have been completed, including a build-to-suit for Caterpillar totaling 300,000 square feet. The park has entitlements for an additional 4 million square feet of office, industrial and commercial space. At full build-out, Phases I and II will feature 8 million square feet of space, making it the largest business park in South Florida.

Earlier this year, Opus South Corporation completion construction on Royal Caribbean Center, a 130,000-square-foot build-to-suit project for Royal Caribbean Cruises. The building, located in Miramar, is 100 percent leased to Royal Caribbean for 15 years.

Banco Internacional de Costa Rica will soon move its North American headquarters from downtown Miami to Coral Gables. The bank has signed a lease in CMC Group's 4000 Ponce, a 150,000-square-foot, nine-story office building. Slated for occupancy in the first quarter of 2002, 4000 Ponce will feature advanced "smart" technology to offer tenants fully integrated broadband communications capability as well as high-speed Internet access and data network service.

The good news is that there are still companies in the marketplace that are looking for space. "There are some significant transactions that are going to fill some of theses spaces, but all that does is move you sideways -- so I think you're going to see that sideways movement for a while. And then as things pick back up we'll get back into a more normal mode," says Robinson.

Raleigh-Durham

The amount of office space being constructed in the Raleigh-Durham area has dropped off quite a bit in the last 6 months, according to Jonathan Chapman, vice president of Keystone Consulting Group. "Most of what was under construction was significantly pre-leased, and because leasing has dropped off so much, you're looking at probably less than 600,000 square feet."

Some of the major players in the area are Spectrum Properties, Duke Realty Corporation, Craig Davis Properties, Highwoods Properties and Capital Associates. In North Raleigh, Spectrum Properties and DRA Advisors are developing Colonnade, an office development that will consist of five five-story buildings totaling 600,000 square feet. "Spectrum has experienced most of the leasing in the last few months mainly because of the lack of space in North Raleigh," says Erik Hector, president of Keystone Consulting Group. "And because of that, this submarket has done better than most."

The Raleigh-Durham office market has been very successful over the past 10 years, absorbing an average of approximately 1.5 million square feet of space per year. "Growth models suggest that the trend will continue at this current pace, but I think those models are overstated by as much as 25 to 50 percent," says Chapman. "I believe a more accurate number is approximately 1 million to 1.2 million square feet over the next 5 years."

This is a direct reflection of the slowing economy. Office vacancies average about 13 percent overall, and the area has not seen those numbers in many years. In the past new industry has flocked to North Carolina -- as fast as developers could build a property, it was being filled. But, as Chapman points out, that trend is slowing.

The basic industries in the Raleigh-Durham market are fairly diverse: government, services and transportation/telecommunications/public utility. "These industries are what many of the office developers cater to, but right now all of those industries are slowing," says Hector.

Hector's 2002 forecast is realistic: "I see us staying in the current level of economic growth during the next 12 to 18 months. Honestly, I don't see a significant turnaround or a real dramatic change in economic activity until the first of 2003; that is my strong belief."

Nashville

In Nashville, there is currently 222,900 square feet of office space under construction right now -- all in the Brentwood/Cool Springs submarket, according to Jim Smith of Colliers Turley Martin Tucker-Nashville. During the third quarter, 331,400 square feet came on line. All of this space was also in Brentwood and Cool Springs.

One significant development that was recently completed is Seven Corporate Centre, a 140,000-square-foot, six-story building by Crescent Resources. This seventh building in Corporate Centre at Cool Springs completes Phase I of the project. According to David McRae of Crescent Resources, the company is currently working on infrastructure improvements to open up Phase II of the development, which will continue with the same type of buildings. The second phase will include six buildings, and construction on the first building will begin sometime in the late spring or early summer of 2002, McRae says. Corporate Centre at Cool Springs will eventually encompass 2.5 million square feet.

Highwoods Properties recently completed Seven Springs I, a 130,500-square-foot, five-story building. Located in the Brentwood submarket of Nashville, the building is part of Seven Springs, a development that could potentially expand to up to four buildings, according to Brian Reames, vice president and division manager for Highwoods in Nashville. Total square footage will be close to 450,000 square feet upon completion.

As for leasing activity, Reames notes that while results have not been as good as in the past, "were still seeing good activityparticularly in the Brentwood/Cool Springs market.He addsthat this submarket is healthiest Nashville. If you going to build place do itReames says.

There are a number of buildings in Cool Springs that are scheduled to be complete by the end of 2001. These developments include Phase II of the Dover Centre development, a 70,000-square-foot building, and a 22,400-square-foot facility in the Kirkland Group's Westgate Commons.

In downtown Nashville, there has been quite a bit of movement from building to building, but there are not many companies moving in from the suburbs to downtown, according to Smith. The merging of several financial services and businesses has had a negative affect on Nashville. "We have about 825,000 square feet of sublease space predominantly in the downtown and Brentwood/Cool Springs submarkets," he notes. The merger between J.C. Bradford and Paine Webber brought 117,000 square feet of sublease space on the market in downtown. This space is currently vacant. AmSouth and First American, companies that merged over a year ago, also created some sublease space.

Nashville's normally strong music industry has been soft as of late, but the healthcare industry is making up for the loss. "Nashville's healthcare industry is very strong right now, and that has had a positive effect on our market," Smith notes. One healthcare deal that was recently completed is Health Trust Purchasing Group, which leased 20,000 square feet in one of Highwoods Properties' Maryland Farms buildings; Colliers Turley Martin Tucker represented Health Trust in the transaction. Another healthcare company is negotiating a 55,000-square-foot lease in Cool Springs, also in a Highwoods building. Other healthcare companies are expanding, and all of this is creating positive absorption.

With construction basically coming to a halt, Smith's 2002 outlook is guarded yet optimistic. "Hopefully we'll start seeing some expanding companies absorb some of this vacant space," he concludes. "But in the last couple of weeks we have seen activity pick up significantly, which means decisions that were on hold are starting to be made."

Charlotte

In Charlotte's CBD, the Hearst Tower is currently under construction by The Keith Corporation and Trammell Crow Company. The 47-story, 950,000-square-foot tower is nearly 100 percent leased, according to David Dorsch of Colliers Pinkard. In Midtown Charlotte, the Metropolitan Group is currently developing the Arlington Building with 40,000 square feet of office space. "This is a very exciting mixed-use project and should be delivered by January 2002," says Dorsch.

Although Cousins Properties does not have any new projects currently underway, the company did recently complete the first phase of a $450 million mixed-use project in downtown Charlotte. Atlanta-based Cousins Properties and Charlotte-based Bank of America are developing Gateway Village, a 15-acre mixed-use development. The recently completed Phase I encompasses 1 million square feet of office space, 65,000 square feet of retail space and about 583 residential units. The commercial space consists of two buildings: 800 West Trade, 650,000 square feet of space that houses the Bank of America Technology Center, and 900 West Trade, where Bank of America is the primary tenant, and the remaining space is leased to technology-oriented companies.

The second phase of Gateway Village, scheduled for completion in 2004, will include approximately 450,000 square feet of office space in the 950 West Trade building as well as another 300 to 350 residential units and 10,000 square feet of retail space. According to Henry Atkins of Cousins Properties, construction on the office building will not begin until an anchor tenant is secured.

As for starting new projects in Charlotte, says Atkins, "We're looking at some options downtown, but there's nothing official as of right now.

"Prospects are good," he continues. "We have a good economy in the long term. Right now everything has slowed, but we're optimistic things will come back."

Dorsch echoes this line of thinking. "There's still activity going on, but the deals are just a little more difficult," he says. "In general, there are still plenty of diamonds in the rough out there. I think that when we go through a recession, Charlotte, like a lot of larger cities in the Southeast, really just experiences a slowdown in growth. We don't ever actually go into negative expansion; we're just not growing as fast. Charlotte isn't going to see job losses or a decline in population or anything like that. I think most people, in the long run, are looking at Charlotte as a place they definitely want to be, and a place where they're definitely going to expand their presence in the future."


©2001 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.