CITY HIGHLIGHT, MAY 2004

ATLANTA MAKES PROGRESS

Metropolitan Atlanta’s economy has experienced the effects of a prolonged national recession that struck at the core of the area’s diversified economy. Atlanta’s telecommunications, information technology, tourism and transportation industries were impacted the most, even though Hartsfield-Jackson Atlanta International Airport maintained its title as the “world’s busiest airport.” It posted the only increase in passengers among all top U.S. airports. The area’s heavy concentration of large corporations and Fortune 500 companies also accounted for significant job losses as profits were squeezed.

However, several of Atlanta’s economic indicators continue to grow at rates higher than both the U.S. and state averages. In 2002, Atlanta remained the top growth area nationwide for population with 108,000 new residents, new housing permits and income levels that grew 10 percent over the national average in the last 5 years. The number of new business relocations and expansions remained stable with 170 new operations, which created 4,690 new jobs and absorbed 4.8 million square feet of space.

The Atlanta industrial market showed improvement with a decline in vacancy levels for all industrial product types. For the first time in 2 years, market absorption in excess of 1 million square feet was reported for consecutive quarters in 2003. The current number of vacant buildings, combined with an ongoing lack of demand, continues to put pressure on rental rates. Until the current inventory erodes and there is a marked turnaround in the economic picture, the depressed rental rates will continue.

Due to low interest rates and weakened demand, the multifamily market experienced a significant drop in the number of renters. Many complexes in suburban areas have had to offer special deals, which have included a combination of free utilities, free rent and other incentives to attract residents. In Midtown and Buckhead, many of the high-end apartment buildings were converted to condominiums, which caused rental rates in these urban markets to stabilize or even appreciate.

Atlanta’s office market continues to exhibit signs that it may have stabilized and could potentially recover some of the tremendous occupancy losses previously experienced. Net absorption, while still negative, has improved somewhat and sublease space continues to decline. Average office rental rates are still dropping by approximately 10 to 20 cents per quarter. New construction continues to remain slow and has been limited to projects with substantial pre-leasing commitments.

Metropolitan Atlanta continues to be ranked the fifth largest retail market in the country. The area took a rest from mall development in 2003 after a flurry of previous activity where two new mega malls were delivered. Atlanta experienced the addition of new national retailers, including Filene’s Basement and Bloomingdale’s. The hot corridors for retail continue to be focused along major highways running northwest, due north and northeast of downtown Atlanta.

— Mitchell Brannen, NAI/Brannen Goddard

Industrial

Demand and leasing activity thus far in 2004 indicate that Atlanta’s industrial market has come out of its recent recession and is currently in the preliminary stages of a recovery mode. Vacancies appear to have peaked, and have hovered around 14 percent for most of the last year. Deliveries of new product dropped precipitously in response to market conditions during 2002 and 2003 and remain restrained

today, allowing existing speculative developments to regain some degree of balance. Given the market’s softness, existing companies and new tenants are amazed at the number of viable alternatives available to them. It is still a tenant’s market, with rental rates regressing and free rent very common on most transactions.

Through all the recent cycles, Atlanta has remained a low-cost leader in industrial space. For companies seeking a national distribution base, Atlanta has always held a strong presence, due in large part to its superior transportation infrastructure. Atlanta boasts the nation’s busiest passenger airport, proximity to ports in Savannah and Brunswick, Georgia, and is one of only five cities in the U.S. with three interstate highways running through it, giving industry rapid access to markets all over the United States and the world. In addition, Atlanta has historically offered some of the lowest real estate costs in the country, comparing favorably with national industrial hubs such as Chicago and New Jersey while remaining competitive with regional neighbors like Dallas and Memphis. In addition, Georgia has low labor costs and low cost of living. All of this makes Atlanta one of the least expensive markets in which to do business.

Most of Atlanta’s industrial product is located either near the airport or along the city’s interstates. As such, the majority of development is taking place in the Airport/South Atlanta submarket and along the northeast corridor of Interstate 85, connecting Atlanta with Charlotte and the Eastern seaboard.

However, like much of the rest of the country, manufacturing here continues to struggle with only faint signs of recovery. Manufacturing has been one of the hardest hit employment sectors, and it is hard to predict when a turnaround might take place. On the other hand, it should be noted that much of Atlanta’s space is designed for distribution, and is not in fact true manufacturing space.

Looking ahead, south Atlanta will continue to be a dominant submarket, but industry watchers should keep an eye on the boom-bust dynamic. South Atlanta’s industrial product continues to be in demand as development in the area spreads further to the south, but the submarket is susceptible to over-development. Absorption and new construction starts here will likely be a bellwether for the industrial market as a whole.

— Blaine Kelley, first vice president, CB Richard Ellis

Multifamily

Now that the Atlanta apartment market has begun to rebound from the bottom of its cycle, expect job growth and higher interest rates to continue adding strength to the market.

Construction continues to decrease as low interest rates and a sluggish economic recovery have strained the apartment market. During 2003, multifamily building permits were down 29 percent from 2002. Additionally, starts were down 22 percent during the same period. The upside is that a decrease in future deliveries will limit the apartment supply, which had been expanding vigorously.

Growing popularity and the development of Atlantic Station, the 138-acre mixed-use development by Jacoby Development and AIG Global Real Estate Investment Corporation, have made Midtown the leading submarket in unit starts. Look for urban submarkets to lead new construction as land prices increase in the northern submarkets and the commute from the north continues to deteriorate. Proposed projects such as The Novare Group’s 1,100 units on a 3.8-acre tract near the Civic Center MARTA (Metropolitan Atlanta Rapid Transit Authority) station may cause Downtown to surpass Midtown as the leader in new construction.

Average quoted apartment rents have dropped after increasing for the past 6 years. Currently, the Buckhead and Midtown submarkets share the highest asking rents at $1.04 per square foot per month. This compares to the lowest asking rents of southwest Dekalb and southwest Fulton submarkets at $0.65 per square foot per month.

The overall vacancy rate improved to 10.1 percent in 2003 from 10.6 percent in 2002. As the economy improves and new construction declines, expect the vacancy rate to further improve. Buckhead currently reports the lowest vacancy rate at 6.8 percent, followed by Midtown at 7.3 percent. Southwest Fulton reports the highest vacancy rate at 17.0 percent.

Sales continue to be robust as investors view the Atlanta market as a wise investment. Many recent sales have been inside the Interstate 285 perimeter where in-town sites offer amenities that many tenants desire. Expect to see more projects within the perimeter exchange hands for renovation. With attractive lending rates, sales activity levels will continue at a strong pace.

Overall, the Atlanta apartment market has a strong foundation; with a decrease in units delivered and continued population growth, expect an optimistic future.

— Erik Pawloski, research director, Bullock Mannelly Partners Inc.

Office

Because of the state of the market — high vacancy, recovering absorption — most of the development in Atlanta’s office market is build-to-suit, significantly pre-leased or niche-oriented.

Recent and significant developments include Hines’ 1180 Peachtree Building. King & Spalding’s significant pre-lease turned things up a notch due to the building’s high quality and cost. It will be interesting to see how it actually affects rates.

Atlantic Station shifts or distracts the Midtown market, and only time will tell if this is good or bad.

The new Southern Company headquarters, World of Coca-Cola and Georgia Aquarium will help revitalize Downtown Atlanta and draw new visitors and businesses to the area.

Midtown and in-town in general are seeing most of the new development in metro Atlanta, primarily due to an influx of new residents and employers’ desire to locate near their employees and take advantage of multiple transit options.

This does not mean, however, that the suburbs will go away. They won’t, and both suburban and in-town office locations have their merits. It’s just that the urban locations are more attractive right now for the bigger tenants that are in play, and that’s partially due to the politics driving the decision-making.

The most active developers include Pope & Land, Barry Real Estate, Hines, Childress Klein and Holder Properties; Granite Properties will have a significant presence in the next cycle. Granite Properties established its Atlanta presence with the acquisition of Cumberland Office Park in 2003, and the company intends to be opportunistic as it expands its office portfolio by acquiring both suburban and urban properties.

— Steve Martin, managing director-Atlanta, Dallas-based Granite Properties

Retail

With 147.7 million square feet of retail inventory and 3.2 million square feet of retail space that came on line in 2003, Atlanta has proven that it can withstand an economic downturn and slow job growth. Now that the economy is showing small signs of improvement, retailers are back in development mode in Atlanta. Areas of Atlanta such as Gwinnett County are over-retailed, but urban locations such as Midtown and Little Five Points are underserved and provide ample opportunity for retail success.

While Atlanta has benefited from fairly high occupancy rates and strong rental rates, several retailers have made a hasty retreat due to stiff competition. Harris Teeter, Kmart Corporation, Federated Department Stores and Lord & Taylor have closed stores in the Atlanta metro area. Meanwhile, Wal-Mart’s Supercenters are surging ahead in Atlanta, as in other markets nationwide. Consolidated Theaters is entering the Georgia market with a 14-screen theater in Newnan, as part of Thomas Enterprises’ 1.2 million-square-foot Newnan Crossing Center off I-85 and Bullsboro Road. Anchors include Target, BJ’s Wholesale Club and other big box retailers. Peebles department store has also announced plans to enter the Atlanta market. Belk is opening and relocating stores to achieve the right mix in Atlanta. The company will open a store on Dallas Highway in Marietta and will relocate its store in Cumming.

The Sembler Company has several projects underway in Atlanta totaling 1.6 million square feet. Perimeter Center Place is a $150 million mixed-use project on the site of two former BellSouth towers near Perimeter Mall. The proposed 1 million-square-foot development, a joint venture of The Sembler Company and Stephen D. Bell & Company, will be anchored by a 175,000-square-foot SuperTarget and will include apartments and a 27-story condominium tower. Portions of the project will open fall 2005. Sembler is also redeveloping Park Place shopping center across from Perimeter Mall. The $40 million project will include the complete renovation of the existing structure, plus the addition of two condominium buildings.

Construction on Sembler’s Edgewood Retail District near Little Five Points is now underway. The 41-acre site is located on the former Atlanta Gas Light site at Caroline Street and Moreland Avenue. The $110 million project will be anchored by Target and Lowe’s Home Improvement Warehouse. The residential component will include retirement housing, apartments and condominiums. Sembler is also building Lindbergh Plaza, which will be comprised of approximately 500,000 square feet of retail and residential units.

Faison Enterprises is expected to be active in Atlanta this year. The real estate development firm is planning a $20 million project in Alpharetta at the intersection of Windward Parkway and Georgia Hwy. 9. Windward Crossing is proposed to be a 160,000-square-foot big-box center. Faison is also developing Kedron Village in Peachtree City, a 260,000-square-foot power center anchored by Target. The $25 million project is proposed for the intersection of Peachtree Parkway and Georgia 74. Both projects are scheduled for completion in 2005.

South Fulton County is booming with retail development. Affordable land prices and proximity to interstates, the airport and the Atlanta central business district have wooed developers seeking opportunity. The area south of Interstate 20 saw 41 percent of the region’s growth from 2000 to 2003. During the 1990s the area grew 28 percent annually.

One of the larger projects in south Fulton County is Camp Creek Marketplace, located outside I-285 on Camp Creek Parkway in East Point. The 1.1 million-square-foot project will open in July with 750,000 square feet of retail. The project is a joint venture of Duke Realty and North American Properties.

New retailers have arrived and more are reportedly coming to North Point Mall in Alpharetta. Apple Computer and White House/Black Market women’s apparel recently opened. Opening this spring and summer are Aveda, Coach Leather Goods, Sharper Image and The Cheesecake Factory, among others. The mall is retenanting to capture its share of the growing, affluent trade area. The closing of Macy’s at Gwinnett Place Mall will require that Simon Property Group backfill the space or split the space into two or more mini-anchors. At North Dekalb Mall in Decatur, Hendon Properties has replaced the former Old Navy space with Ross Dress For Less. Stein Mart is leaving the mall, but Rhodes Furniture will join the tenant lineup.

The big spender in Atlanta retail investment over the last 5 years has been Inland Retail Real Estate Trust. The real estate investment trust paid $131 million to acquire the 1.8 million-square-foot Fayette Pavilion from Thomas Enterprises Inc., marking the transaction as the largest Atlanta retail deal in 2003. Fayette Pavilion is anchored by Wal-Mart, Publix and Kohl’s. Non-owned anchors include Home Depot and Target. The total purchase price will be $172 million once construction of BJ’s Wholesale Club is complete. Inland spent an additional $330 million in 2003 to buy 13 Atlanta retail centers, including MarketPlace at Mill Creek in Buford, Newnan Crossing and Heritage Plaza in Smyrna.

In December 2003, AJ&C Garfunkel acquired the 77,356-square-foot Lovejoy Station from Regency Realty and its joint venture partner Macquarie CountryWide Trust of Australia. AJ&C Garfunkel paid $10.7 million for the Publix-anchored center in Hampton, Georgia. The center was 95 percent occupied at the time of sale.

In January, Ronus Properties, an Atlanta-based real estate asset management and leasing company, sold Stone Mountain Square, a 336,663-square-foot power center. Stone Mountain Acquisition paid $28.1 million for the center, located at the intersection of U.S. Highway 78 and Rockbridge Road. Anchors include Staples, Marshalls, Media Play, T.J. Maxx, Crunch Fitness, Old Navy and Rugged Wearhouse.

In February, Barrett Crossing LLC acquired Barrett Crossing Shopping Center for approximately $8.2 million. The center, located in Kennesaw, is anchored by Winn-Dixie and includes space formerly occupied by Kmart.

— Lynn Leonard, vice president of marketing, NewBridge Retail Advisors


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