CITY HIGHLIGHT, MAY 2012

ATLANTA CITY HIGHLIGHTS

Atlanta Office Market

For the first time in 30 years, not a single office building greater than 50,000 square feet is being built on speculation in the Atlanta office market. There are several macro-

economic reasons for this but the principal cause is the relatively slow increase in employment.

Rajeev Dhawan, the director of Economic Forecasting Center at the J. Mack Robinson College of Business at Georgia State University, expects Georgia to add 26,800 jobs in 2012, of which 6,300 jobs would be considered ‘premium’ jobs, while Atlanta’s economy will gain 17,400 of those jobs for the year — with 3,900 being premium or well-paid positions. This is all good, but it may not be enough.

Compounding the jobs challenge, office users are looking for less square footage per employee to reduce occupancy costs. The average is now under 200 square feet per employee and likely to trend lower.

Against this backdrop, the Atlanta office market ended the first quarter with a vacancy rate of 16.5 percent, according to CoStar Group. In addition, there is nearly 1.9 million square feet of available sublease space. Net absorption for the overall Atlanta office market was 520,046 square feet, CoStar reported. Despite this positive data point, Atlanta office rents — which ended the first quarter of the year at $18.36 per square foot — could not support new office developments.

Carrying over from the first quarter, Atlanta should experience modest net absorption gains for the balance of the year, most of which will still be concentrated in Class A buildings as tenants continue their flight to quality.

Class A space in Buckhead has been the biggest beneficiary of Atlanta’s flight to quality in companies not just moving to higher quality office buildings, but also upgrading submarkets. Since January 2010, Buckhead has accounted for approximately 75 percent of the Class A net absorption in Atlanta. A majority of the office space developed in the last cycle, which afforded tenants significant concessions, is now committed. Furthermore, only two buildings in the entire submarket, Phipps Tower and Atlanta Plaza, contain blocks in excess of 100,000 square feet.

While heavy concessions are starting to burn off, asking rates will tread along the bottom and not see significant improvements until occupancy levels rise considerably.

In terms of leasing activity, Kids II is moving into 105,818 square feet at Terminus 200 in Buckhead, while ACE USA is moving into 96,293 square feet at Royal Centre Two North Fulton. FLEETCOR will relocate into 65,846 square feet at Spalding Ridge in the Peachtree Corners submarket.

Cox Enterprises is responsible for the biggest owner/user activity in Atlanta as it continues to develop two 300,000-square-foot buildings in the Central Perimeter submarket in an effort to consolidate its operations.

While there are no major speculative office buildings in the pipeline, Jamestown Properties is redeveloping the former Sears distribution center on the eastern edge of Midtown into a mixed-use property. Rebranded as Ponce City Market, the 2.1 million-square-foot center will include a hotel, residential and retail components, and some speculative office space.

For the remainder of 2012, we are guarded and expect that most of the activity will consist of vertical movement which will generate a minor amount of true net absorption — around 500,000 square feet.

The biggest upcoming issue in the community will be determined July 31, when voters will approve or reject a transportation sales tax initiative with much of the added tax revenue slated to expand the 10-county Metro Atlanta region to build 157 transportation projects. (We believe it will pass.) The sales tax would reach 9 percent in Atlanta and 8 percent in Fulton and DeKalb if passed.

The net effect of added transportation revenue has potential long-term consequences for all the Metro Atlanta counties. Namely, a likely increase in speculative, suburban office development projects along the new routes.

— Alan Joel and Dan Granot are co-principals of Atlanta-based Joel & Granot Commercial Real Estate/CORFAC International.

Atlanta Retail Market

A rendering of Avalon, a mixed-use development in Alpharetta, Georgia, which is slated to open in October 2013.

Atlanta continues to trail much of the country in the pace of its economic recovery, and that’s reflected in the level of activity in the city’s retail real estate market.

The focus is almost entirely on redevelopment and reinvigoration of existing properties instead of building new retail centers, and this probably won’t change for a while. At the same time, many companies are taking advantage of a favorable market for acquisitions and dispositions by either buying or selling properties.

That said, there are plenty of signs that overall activity should soon pick up significantly. Lenders are making more visits to retail real estate specialists, taking the first steps towards increasing their participation in new projects. And a number of retail developments are taking aggressive steps to add tenants and to improve their centers’ performance.

In town, Atlantic Station is working to secure new tenants as it looks to draw more shoppers. Meanwhile, there continues to be buzz that Buckhead Atlanta, a planned OliverMcMillan development that could transform the heart of Buckhead, may move forward this year.

And in Brookhaven, Towne Brookhaven is filling up with a wide range of restaurants from the Which Wich sandwich spot to the mix n’ mingle Mexican restaurant Noche Tequila & Tapas Bar to the movie-

restaurant combination CinéBistro. This demonstrates the power of eateries in drawing retail traffic.

Outside the Perimeter, many retail centers continue to struggle, particularly in locations where stores were built on the assumption that new households would be coming. This situation will not change until the housing market improves significantly.

Not all locations in the suburbs are struggling, though. For example, Alpharetta continues to thrive, illustrated by plans for one of Atlanta’s few major new construction projects, called Avalon.

The prospect of creating a large walkable district that could include residential, retail and hotel aspects makes Avalon particularly interesting. It’s no secret that these types of developments are very appealing, particularly for younger people who value the opportunity to live, work and play with a minimum of driving.

The appeal of walkability has been a major factor in the success of retailers and restaurants in such in-town neighborhoods as Virginia Highland and Inman Park, and it will be interesting to see how this idea plays in the suburbs.

At the same time, quality locations in desirable neighborhoods continue to be a major attraction for investment in redevelopment. One such spot that’s in the news is Suburban Plaza in Decatur, where there’s been neighborhood controversy about the possibility of a Walmart Supercenter coming in.

As Atlanta heads into the summer, the focus in the retail sector will continue to be on redevelopment and securing desirable new tenants, particularly in Class A locations where retailers may have gone out of business because their offerings didn’t match consumer demand.

For smart developers and retailers, opportunities are there. The question is how quickly the Atlanta economy will truly rebound — a question that doesn’t yet have a clear answer.

— Bill Brown is president of Atlanta-based Halpern Enterprises Inc.

Atlanta Multifamily Market

Cousins Properties and Gables Residential are developing Emory Point. The first phase will include more than 80,000 square feet of retail space and 443 apartments.

The Atlanta multifamily market has seen increased sales and development activity during the last 12 months, and this activity is expected to continue through 2013. The strongest sales activity has been in the Buckhead and Midtown areas. Generation Y has increased their presence in the job market, and they seem to be drawn to the urban setting of the in-town areas. This re-concentration of the younger population is driving a demand for in-town apartments.

Both the frequency and pricing of acquisitions have heated up in recent years. Institutional flight to quality and availability of debt not seen in other commercial real estate investment types has fueled demand and lowered cap rates on property acquisitions. Recent in-town sales include the 276-unit Biltmore at Midtown, which sold for $185,054 per unit with an astonishing cap rate of 4.25 percent after sitting on the market for just 28 days; Downtown’s Mariposa Lofts sold for $158,103 per unit with a 4.80 percent cap rate; and The Windsor at Brookhaven sold for $187,456 per unit with a 5 percent cap rate.

In conjunction with the demand for in-town multifamily investments, apartments have seen an uptick in operating performance as well. In-town markets have been very strong with rents averaging 99 cents per square foot and a vacancy rate of 6.18 percent. This compares well to the suburban markets such as Alpharetta, West Fulton, South Fulton, Gwinnett, Cobb and Dekalb counties, where average rental rates are 68 cents per square foot and vacancy is 13.1 percent.

Thanks to the availability of debt for in-town markets, five projects have broken ground and another 15 projects are up for proposal.

Five projects under way:

77 12th Street: Daniel Corporation is building the third phase of the 12th and Midtown mixed-use project. The 23-story, 330-unit multifamily tower on the corner of 12th Street and Crescent Avenue will be anchored by 20,000 square feet of street-level retail. This phase is slated for completion in early 2013.

Skyhouse: Novare Group’s latest development is also on 12th Street in Midtown. The project will have 320 rental units and it is expected to open in December 2012.

92 West Paces: A 2.4-acre site that sold for $6.7 million in April 2011 is adjacent to the St. Regis hotel in Buckhead. Although current plans are not available, the project will reflect an increased confidence investors have in luxury apartments.

235 Pharr Road: This $62 million, 375-unit development will be located on Pharr Road across from the Streets of Buckhead project.

Emory Point: A joint venture of Cousins Properties and Gables Residential, Emory Point is the first new major retail development built in the trade area in 20 years. The first phase will include more than 80,000 square feet of retail space and 443 luxury apartments. The project will open in fall 2012.

As long as Atlanta’s population and employment continue to grow and homeownership remains unfavorable, the multifamily market should move to a balanced state. For the short run, the emphasis will be on in-town, specifically Buckhead and Midtown. However, with enough momentum, we should begin to see green shoots in other areas inside the Atlanta’s Interstate 285 perimeter highway, including the Eastside, West Midtown, and Decatur.

— Joshua Goldfarb, managing director, and Kenny Budd, underwriting analyst, are based in Southeast Apartment Partners’ Atlanta office.

Atlanta Industrial Market

Although the past four quarters have been a roller coaster ride, we are starting to see some positive developments in the Atlanta industrial market.

Increases in retailers’ online sales have spurred several recent industrial announcements. Best Buy, which is shutting down some of its big box retail stores and opening smaller retail stores, will counter storefront reductions with large e-commerce distribution centers to handle the increasing Internet sales.

Carter’s, the children’s clothing retailer, just announced plans to lease a 1 million-square-foot facility just north of Atlanta in Braselton, Georgia, as an e-commerce distribution center.

Approximately 10 miles northeast of Braselton, in Pendergrass, Georgia, Bed Bath & Beyond will lease an 810,000-square-foot facility, also to be used as an e-commerce distribution center.

It has been reported that Home Depot is searching for a location south of Atlanta in the McDonough/Henry County area for a 1 million-square-foot build-to-suit facility for yet another e-commerce distribution center.

While e-commerce distribution centers have started to make headlines, there have also been announcements regarding the “normal” industrial distribution centers that are so prevalent in the greater Atlanta industrial market. Panattoni Development will build a 900,600-square-foot distribution center in the McDonough/Henry County area for Georgia Pacific. Lowe’s plans to open a new 1 million-square-foot build-to-suit distribution facility in Rome, Georgia, 70 miles northwest of Atlanta.

The revitalization of manufacturing is also making a comeback in the greater Atlanta area with announcements being made in Gainesville/Hall County, Meriwether County, and the Athens/Clarke County areas.

Just northeast of Atlanta in Gainesville, Pattillo Construction recently built a new 260,000-square-foot manufacturing facility for ZF Wind Power. Southwest of Atlanta in Meriwether County, Korean auto parts manufacturer and distributor Mando Corporation plans to build a 488,000-square-foot manufacturing facility.

On February 17, Governor Nathan Deal announced that Caterpillar, one of the world’s largest heavy equipment manufacturers, will build a new $200 million manufacturing facility on 265 acres in Athens, Georgia, 70 miles northeast of Atlanta.

The good news doesn’t end there. Rumor has it that Microsoft is searching on the west side of Atlanta for a location to build a 1 million-square-foot data center facility.

Lastly, IDI Development recently announced plans for a spec industrial development on the west side of Atlanta starting with the construction of a 650,000-square-foot distribution facility. Why is IDI building a spec building with so much vacant space still on the market? Of all of the available space now on the market, only 5 percent of that space is actually new space. Due to the absence of new space and the appeal of the location, we believe that the project is a good move for IDI at this time.

While we can’t say the ride is over for the Atlanta industrial market, it certainly looks like we are past the worst part of the roller coaster ride.

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

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