CITY HIGHLIGHT, MAY 2011

ATLANTA CITY HIGHLIGHTS
Christie Carden, Sim Doughtie & Fred Sheats

Atlanta Retail Market

Flat is the new up is the caveat that should precede any discussion of Atlanta retail in 2011. Although there are positive signs indicating recovery is near, factors such as high unemployment levels, the rising cost of gasoline and a continued lack of consumer confidence will need to be improve before Atlanta can be on a real path to revival.

On the positive side, the lack of new construction plus the pent-up demand for quality space will help stabilize retail vacancy rates that are currently at approximately 11.9 percent. As of March 2011, the unemployment level in Georgia had decreased for two consecutive months from 10.2 percent in January to 10 percent in March. However, March also marked the 42nd straight month that Georgia’s unemployment rate was higher than the nation’s. Atlanta’s job growth is also expected to increase 1.6 percent in 2011 (compared to 2 percent nationally) with an infusion of 37,000 new jobs, primarily white-collar sectors inside Interstate 285. Unfortunately, employment in the construction industry will continue to languish.

Retail absorption will continue to occur inside Interstate 285 and then migrate slowly towards the affluent, suburban areas of northeast and northwest Atlanta. Class A core retail space and outparcels have garnered the most attention. National retailers, such as Chase Bank, Mattress Firm, AT&T and McDonald’s, were quick to move to acquire prime locations when opportunities first arose.

New retail development in metro Atlanta has slowed to a mere trickle. Only 450,000 square feet of retail construction is expected to be completed in 2011. In comparison, approximately 5.2 million square feet of retail was added to the market in 2009. The lack of new construction will force proactive retailers to seek-out A+ locations currently occupied by vulnerable retailers. The same “shark-to-blood-in-the-water” mentality that emerged following the Circuit City and Linens ‘n Things closings will apply to the announced Borders and Blockbuster closings. Previously stalled developments, such as the 500,000+-square-foot, mixed-use Streets of Buckhead (Oliver McMillan), the 435,000-square-foot Outlet Shoppes at Atlanta (Horizon Group Properties) and 82,000-square-foot, mixed-use Emory Pointe (Cousins), have regained momentum with delivery is slated for 2012 or 2013 at the earliest.

National tenants looking to expand in the metro Atlanta area include LA Fitness, PF Chang’s fast casual concept Pei Wei, Panera Bread, TJ Maxx HomeGoods, CVS/Pharmacy along with a multitude of medical tenants, such as Kaiser Permanente, that are beginning to prefer a retail presence. One of the most significant leases so far this year has been the 32,000-square foot LEGOLAND Discovery Center at Phipps Plaza. This $12 million project, which requires the removal of the mall’s food court, is an example of how existing retail is being redeveloped to accommodate retailers’ needs in lieu of new construction.

It is estimated that it will take 3 years for Atlanta’s retail to regain its balance in comparison to the national average of just over 4 years. Steady retail growth coupled with minimal new retail construction and still relatively aggressive deal structures will enable Atlanta’s 322 million-square foot retail sector to regain its footing in preparation for the next cycle.

—  Christie Carden is with The Shopping Center Group’s Atlanta office.

Atlanta Industrial Market

As the second quarter of 2011 begins, which will hopefully usher in a fruitful new spring, it is important to take stock of where the industrial market is at this point in time. Using the results from the first quarter of 2011, there are trends in the Atlanta industrial market that are worthy of note.

First, the Atlanta industrial market had more than 12 million square feet of activity in the first quarter of 2011. If this level of activity continues for three consecutive quarters, the industrial market would experience the third best year of annual activity in Atlanta’s history with a total of 48.3 million square feet. No one can predict if this will indeed happen, but activity has been above 10 million square feet for each of the last six quarters, with the exception of the fourth quarter of 2010, when we experienced a drop to 8.27 million square feet. This aberration was caused by uncertainty in the marketplace due to the then-pending election, the concern of whether or not the Bush tax cuts would be reinstated, and the future cost or tax needed to pay for the new healthcare plan that had just been passed.

With the election behind us and the Bush tax cuts reinstated, tenants are no longer fearful and purchasers no longer feel they will be taxed into oblivion in the near future. This has led these prospects to enter the industrial marketplace in the first quarter and sign the 710 transactions responsible for the total of more than 12 million square feet in new deals. I believe activity will continue at these higher levels because business owners have cut expenses over the last few years and saved cash reserves. Business owners are experiencing some pent up demand as they pick up new customers from competitors who have gone out of business.

The increase in activity was not the only trend. The market also saw a notable increase in the term of the transactions being executed. The number of 5-plus-year lease terms executed in our offices during the first quarter of 2011 more than doubled from the same period last year.

The longer lease terms are also a reflection of business owners and tenants regaining their confidence. Tenants are realizing time may be running out to take advantage of the currently lower rental rates due to the unusually high availability rate. With a distribution inventory in Atlanta of 602 million total square feet and 127 million (21.2 percent) square feet of that inventory available, landlords are willing to lower their asking rental rates to fill their vacant buildings.

 Sale transactions are another upturn we are seeing. As business owners regain their confidence and banks begin to lend money again, we are seeing more closings and more executed sales contracts.

We have also seen an extremely high level of negative net absorption. Over the past 3 years, more than 33 million square feet have been offered back to the market; the high point being over 6 million square feet in negative net absorption in the third quarter of 2009.

In the second quarter of 2010, negative net absorption was only 457,344 square feet; in the fourth quarter of 2010, the negative net absorption was only 487,401 square feet. Although in the first quarter of 2011, the negative net absorption rose to 1.48 million total square feet, 1.3 million square feet of that was attributed to the Solo Cup building being put on the market for sublease. Otherwise, first quarter negative net absorption would have been only 184,869 square feet. While negative net absorption still persists, this dramatic improvement in the numbers leads me to predict that somewhere in the second or third quarter of this year we will start to experience positive net absorption in the Atlanta industrial market.

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

Atlanta Office Market

The first quarter of 2011 brought little change for the office real estate market in Atlanta, a pattern which Fred Sheats, senior vice president of Colliers International’s Atlanta office, predicts will continue throughout the year.

There was negative absorption in the first quarter 2011 of 153,163 square feet. The fourth quarter of 2010 saw positive absorption of 187,773 square feet. Despite the negative absorption, the vacancy rate remained relatively unchanged at 18.3 percent. The Class A vacancy rate for the first quarter of 2011 was 18.6 percent, down 0.8 percent in the first quarter of 2011 and was down 1.1 percent from a year ago.

Sheats believes part of the reason Atlanta saw negative absorption in the first quarter is because businesses are trying to do more with less office space. Examples he cites are people sharing offices, workers who spend a lot of time out of the office, moving from offices to cubicles, and the idea of “hoteling,” where workers dock into a portal somewhere to do work and then leave.

“The Atlanta office market is a little more than 200 million square feet of office space,” he says. “From a supply standpoint, we’ve got a good bit of product out there.” There is more than 39 million vacant square feet in the market.

Sheats says there were no new developments announced in the first quarter, and he believes that there probably won’t be for at least a couple of years due to the large amount of office space currently available. At the end of 2010, approximately 150,000 square feet of space was under construction. However, he believes that in time the submarket along Georgia 400 will emerge as one of the leading high-tech office areas in the country.

“There’s a lot of stuff going on from a macro standpoint with the economy and job growth, but there’s also technology and demographic pressure,” Sheats says. “So, all of that is impacting real estate. I think you’re going to continue to see some downward pressure on occupied square footage.”

Sheats also points out that uncertainty about the job market is preventing companies from hiring and growing their businesses.

Strong Atlanta submarkets are the same as they have been traditionally. Buckhead and North Fulton had positive first quarter net absorption that was 217,151 square feet and 253,294 square feet, respectively, which was exponentially larger than the rest of the Atlanta market. Northeast Atlanta, one of the biggest submarkets, saw virtually no change with a negative absorption of only 13,552 square feet. Sheats says this is due to lack of sufficient space for bigger tenants and some of the properties being located off the beaten path. He doesn’t foresee much shift in terms of leading submarkets.

Sheats predicts that Atlanta will see a positive absorption in 2011, similar to 2010, which had three quarters were that positive.

“I see 2011 being a mirror image of 2010,” Sheats says.

—   Savannah Duncan

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