CITY HIGHLIGHT, MAY 2010

ATLANTA CITY HIGHLIGHTS
Sim F. Doughtie, Alan Joel, Sean P. Henry, Ty Underwood and Fain Hicks

Atlanta Industrial Market

The good news is that 48 percent of U.S. metro areas are on the rebound. According to the Adversity Index compiled by MSNBC.com and Moody’s Economy.com, 183 of the 384 metro areas tracked in the United States have begun to recover from the current recession. The bad news is that Atlanta was not among that fortunate group.

The activity and net absorption results for this first quarter of 2010 can’t dispute those findings. After a better than expected end to last year, the Atlanta industrial market lost momentum in the first quarter. Activity slipped to 8.8 million square feet — down slightly from the fourth quarter 2009 performance, but not as low as the previous quarters in 2009. Deals are definitely being made. In fact, more deals were inked in this first quarter than in the closing quarter of last year — proof positive that tenants are coming and going. Unfortunately, the “going” side is out-pacing the “coming” side. Net absorption of negative 3.3 million square feet was the end-result in the distribution sector for the first quarter of this year.

At negative 1.3 million square feet, the Henry/Clayton county submarket led all other submarkets in this negative net absorption. Activity in the Airport submarket dropped below 1 million square feet. In addition, the level of space given back to the market in this area for the quarter hasn’t been this high since the second quarter of 2008. Only three submarkets started the year in positive numbers for net absorption. The South Fulton County and Cobb/Douglas Counties submarkets got to the positive side thanks to the Clorox (1,145,378 square feet) and Colgate (744,331 square feet) deals.

New construction continues to be dominated by build-to-suit projects. During the past four quarters, only 2.1 percent of ground broken has been for spec construction. Despite this meager addition to inventory, the availability rate in the metro industrial market inched up for a sixth consecutive quarter and now rests at 20.9 percent.

While all this news clouds the skies, recent economic indicators are showing signs of a better forecast. March saw a surge in retail sales. February posted a slight gain in exports. Recently, 162,000 jobs were added to the economy (17,000 in the manufacturing sector). The Dow Jones industrial average is hovering at the 11,000 mark. And during the fourth quarter of 2009, the overall economy, as measured by the gross domestic product, grew at an annual rate of 5.9 percent, with forecasts expecting the growth to remain about 3 percent for this year.

The Adversity Index also puts Atlanta on the list of metro areas next to rebound. And why not? In the 2009 Forbes magazine rankings, Atlanta placed in the top 10 for “Cities with the Most Fortune 500 Headquarters”, “Cities with the Most Global 500 Headquarters”, “Best Places for Business and Careers”, “America’s Most Wired Cities” and “Best Cities for Singles”. Atlanta has been, and always will be, a force to be reckoned with. There are deals to be made. Go get ‘em and add to the upside of a market poised for a comeback.

— Sim F. Doughtie, CCIM, SIOR, MCR, is president of King Industrial Realty/CORFAC International, based in Atlanta.

Atlanta Office Market

It is the best of times; it is the worst of times. It is the time of free rent; it is the time of big TIs; it is the time of lease concessions. Perhaps this is not the exact perspective Charles Dickens had in mind, but it certainly fits the current Atlanta office market. So, what is it?  The best or the worst of times truly depends on which side of the table you’re sitting on. 

During the past 3 years, the Atlanta metro office market has gained 5 million square feet of space but decreased in occupancy. In 2007, the market had 120 million square feet of space and an 83 percent occupancy rate. The rate dropped to 80 percent, while space rose by 3 million in 2008. Last year, total space rose by 2 million more feet and occupancy dropped to 78 percent.

For tenants looking for space and who can commit to long-term leases, it is the best of times. Concession packages unheard of 24 months ago are the norm now. Most mid- to large-size tenants are not only negotiating tough deals for landlords, but they are also negotiating tough deals with the landlords’ lenders. Forward commitment of TI and leasing commissions, subordinated non-disturbance agreements and rights to cancel typically asked by the landlords to the lenders are now being required by the tenants from the lenders. For landlords and lenders, it is the worst of times.

So what does the next 12 months look like? Much the same, but tenants beware: the pendulum will change. Here are the reasons why:

1) For the first time in 30 years there are no speculative office buildings greater than 100,000 square feet under construction in the metro area and none scheduled for construction to begin in the next 12 months.

2) The new health care plan proposes to require or subsidize more than 32 million Americans with health insurance. Who is going to issue these policies?  It’s going to be issued by the current health insurance carriers and drive demand for office space. By some estimates, with this increase these insurance companies could need more space to the tune of about 1.9 square feet of office space per policy, which totals an astounding 64 million square feet nationwide. While this growth would be felt across the United States, Atlanta will see its fair share of the expansion.

3) The economy will get better over time and with increased confidence (and income) tenants will be expanding — something very few have done during the past 2 years.

4) Atlanta is still one of the top 10 cities to live in and the region will continue to lure corporate tenants like NCR and Newell Rubbermaid.

So, if you’re a tenant in today’s market, enjoy these best of times (and use it to help your business) for surely within the next 24 months these best of times will be a faded memory.

—Alan Joel is principal of Joel & Granot Commercial Real Estate/CORFAC International, based in Atlanta. Mr. Joel is also President of the Atlanta Commercial Board of Realtors.

Atlanta Multifamily Market

Southeast multifamily markets have been hit harder by the recession than other markets. Atlanta and most tertiary markets in the Southeast have experienced an 88 percent drop in apartment transaction volume. Secondary markets like Birmingham and Memphis have experienced a greater drop at 97 percent. The market in the Southeast with the lowest drop has been Nashville with an 82 percent drop in volume.

Apartment operations have suffered as well. Dale Henson Associates reports that street rents in Atlanta garden-apartment properties have fallen 5.5 percent in the past year. However, the use of concessions also has dropped; as more properties incorporate lease rent optimization software and daily pricing strategies, they are less reliant on concessions. The impact as reported by Dale Henson Associates is a more moderate drop in realized rent of 2.4 percent. These drops have been fairly consistent across property classes A to D. Occupancy, on the other hand, has more severely impacted the lower quality properties. In Atlanta, Class A apartment properties have increased in occupancy during the past year to 91.7 percent while class D properties have dropped to 83.3 percent occupied.

Case Studies & Other Mixed Signals

In the past 12 months, two Class A properties in Atlanta were resold that had previously traded in 2005 and 2006. They were Block Lofts and Gables Lenox Hills, two high-end properties that have been professionally managed and remained essentially unchanged in condition. The resales indicated a drop in value from 23 to 25 percent from the previous sales 5 years earlier, not a surprising number given the current state of the market. The surprising thing is the similarity of the financials behind the deals. Most investors would expect the income to have dropped during this time frame, but, as it turns out, the income had actually grown by 4.5 to 5 percent at both properties. It was the 14 to 16 percent increase in expenses that caused the net operating income to drop by 3.5 percent. Combine that drop in NOI with a 130 basis point increase in cap rate? The result is the 23 to 25 percent drop in value.

Transaction volume has once again caused people to question the liquidity of real estate as an investment. The drop in rental rates and weak occupancy raise concerns about the housing market, and the seemingly endless increases in expense ratios cause investors to ponder the long-term viability of the apartment industry’s entire business model. So why  are the capital markets gearing up at a record pace to acquire real estate? There is a staggering amount of money being raised by both public REITs and private equity. Here in the Southeast, local real estate groups like Bell Partners continue to find investors with an appetite for investment in real estate; they just completed raising $50 million of equity to invest in apartments.

So, why is so much money being raised? The answer is in the demographics. Apartments present an attractive housing option for a younger and, many times, more transient population. Typically, multifamily housing is well located near employment centers and offers an affordable option for housing without a long-term commitment. The burgeoning echo-boom generation is now in the 20 to 34-year-old age bracket. This represents a huge client base for the multifamily industry. According to Maximus Advisors and Census.gov, this age group has grown nationally by more than 2 million people since 2007 and is expected to grow by the same amount by 2013. This bodes well for the outlook of Atlanta and other Southeastern cities where the population is younger.

The problem thus far has been that this very same age bracket has been hit the hardest in this recent economic downturn. Nationally, the unemployment rate among 20 to 34-year-olds is at a record high near 12 percent, and among 20 to 24-year-olds it is near 16 percent. The increase in unemployment since 2007 exceeds 9 percent for the 20 to 24-year-olds in Georgia, having a significant impact on this demographic with record numbers having moved back home to live with their parents while they struggle to find employment. As the unemployment in this age cohort returns to a historical norm, the demand for apartments will skyrocket.

Set To Build Momentum?

Apartment construction has dropped to record-low levels almost everywhere. In Atlanta, Dale Henson Associates has reported that multifamily starts dropped to a mere 427 apartment units in 2009. Currently, DHA reports physical occupancy of 88.5 percent for all classes and 91.7 percent for Class A. The total stock of apartments in Atlanta is roughly 400,000 apartments. Accounting for a 4 percent frictional vacancy, the current low occupancy means there are roughly 30,000 apartment units readily available for an up-tick in demand.

Meanwhile the single-family, for-sale inventory is falling. The First Multiple Listing Service reported a year-end 2009 inventory of single-family, for-sale properties in Atlanta to be 41,570. This number is down 24 percent from the year-end 2008 figure of 54,680 and down an enormous 41 percent from the record high of 70,505 in August 2007. The potential exists for a quick increase in demand without much overhang of supply. Maximus Advisors reports that the Atlanta population continues to grow by nearly 115,000 people per year. The population age 20 to 34 alone is expected to grow by nearly 130,000 people in the next 5 years. Using the current homeownership rate, this age group alone could wipe out all excess supply. The 20 to 34-year-old age bracket will account for demand of more than 67,000 apartments in the next 5 years in Atlanta. This will mean increasing occupancy rates, leading to inevitable rental increases at very high levels as demand outstrips supply.

All of these factors contribute to the now common headlines about record numbers of offers for properties being brought to market. For example, the Gables Lenox Hills deal received 37 offers. The demand to acquire these properties certainly exists today.

Property performance is down, but record amounts of capital are being raised and there is reason to believe in an optimistic demographic outlook for apartments. Sellers are receiving record numbers of offers. However, the mismatch of capital being raised to transaction volume has posed serious questions from the capital markets. This is resulting in many new capital raises being cancelled or postponed.  Many of the bidders on these recent sales did not actually have access to the capital they believed they were bidding for. The Gables Lenox Hills transaction took 197 days to close from the initial start of marketing. This same property received less than a third of the offers during marketing in 2004 and closed in 106 days, almost half the time. Financing applications are being met with more detailed questions than ever before. There are more groups in existence to acquire properties than ever before and the process of determining which groups can actually perform and which groups actually have the money they think they have is more difficult than in the past.

The outlook is strong for the multifamily business and the capital markets recognize the opportunity. The challenge today is to sift through the hordes of callers and ideally match the properties with the right buyers.

—Sean P. Henry is in the Atlanta office of Apartment Realty Advisors.

Atlanta Retail Market

Current market fundamentals indicate that overall retail activity is stabilizing or improving both nationally and in the Atlanta MSA. Retail sales rose 1.6 percent nationally in March. Total Atlanta vacancy remains at 10.5 percent through the first quarter of this year. This is the same vacancy rate as fourth quarter 2009. The average rental rate for all retail properties in Atlanta is $14.46 per square foot, which is slightly less than the previous quarter.  

There is an uptick in investment sales action and notable increases in activity. Through February, $161.2 million of retail properties sold in Atlanta this year. Several retail investment sales brokers report a spike in demand for core quality and stabilized, grocery-anchored investment opportunities. This demand is evidenced by the $424 million portfolio sale from Inland/ DDR to TIAA-CREFF. The portfolio consisted of 16 assets located in Atlanta and other Southeastern markets. The Retail Investment Property Group of NAI Brannen Goddard reports having several significant retail properties under contract and is experiencing aggressive bidding on other high-quality, available properties. A further indication of a strengthening marketplace is the recent high-profile offering of Town Center at Atlantic Station by Eastdil Secured. The property is a 586,000-square-foot, open-air center that is currently 87 percent occupied. It is a high-quality, urban infill project with a tenant roster including Publix, Gap, H&M, Ann Taylor, Dillard’s and JoS. A. Bank, among others.

For the most part, retail development in Atlanta seems to be in a holding pattern. We are aware of a number of deals seeking capital and being reworked to achieve today’s lender and investor thresholds. There seems to be large amounts of equity seeking development yields in excess of 10 percent to 12 percent for well-located and prudently underwritten deals. Inland Atlantic is underway with a significant 300,000-square-foot development deal know as Old National Market Place located in College Park. The Streets of Buckhead is another high profile development deal that remains on hold. There is a lot of interest and focus on this project as its progress and ultimate outcome will be a great indicator of the state of the retail and capital markets.

With more than 30 million square feet of available space in Atlanta, the current level of development activity seems appropriate. There is 518,120 square feet of retail properties under construction, which is a fraction of the Historical Average Annual Delivered Inventory of more than 6 million square feet.

Most of the new leasing activity seems to be from backfill or second-tier tenants.

Alan Joel of Alan Joel Partners represented Peachtree Hope Charter School in a 70,565-square-foot deal at Parkview Station near Decatur in the first quarter of this year, which is the biggest deal we know of at this point. Weingarten Realty signed a 33,850 square foot deal in Lakeside Marketplace in Kennesaw with Furniture Xpress as well. These are the types of deals currently getting done in Atlanta.

Brokers representing the higher quality, credit tenants seem to be much more active in the last few months, which is a very good sign that the leasing market in Atlanta and the Southeast is improving.

—Ty Underwood is senior vice president, and Fain Hicks is vice president of NAI Brannen Goddard, Retail Investment Property Group.

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