FEATURE ARTICLE, OCTOBER 2008

Atlanta Market Finds Favorable Conditions
New projects and those on the horizon still find favorable conditions.
Roundtable moderated by Jerrold France, Scott France, Randall Shearin and Chris Thorn

Recently Shopping Center Business hosted its annual Southeast Retail Roundtable at the offices of Arnall Golden Gregory (AGG) at Atlantic Station in Midtown Atlanta. Many thanks to AGG for hosting us once again. The list of attendees at the 2008 Southeast Retail Roundtable included: Ed Allen, Madison Retail; Steven Cadranel, Ben Carter Properties; Ruth Coan, Shopping Center Group; Kris Cooper, Jones Lang LaSalle; Christopher Decoufle, CB Richard Ellis; Hazel Dennis, Fickling & Co.; Jay Goldstein, GreenLight Development Services; Brian Leary, AIG Global Investment Real Estate; Brian Lefkoff, Colliers Spectrum Cabule; Mac McCall, Marcus & Millichap; Michael McMillan, RCG Ventures; Joel Murphy, Cousins Properties; Peter Pelt, Equity One; Bill Read, Developers Diversified Realty Corp.; Abe Schear, AGG; Harold Schumacher, Schumacher Group; Bob Shapiro, Teavana; Ray Uttenhove, Staubauch Retail; and Steve Wathen, Equity Inc. 

(left to right) Christopher Decoufle, Brian Leary, Ed Allen and Mac McCall.

SCB: Chris [Decoufle], how does Atlanta’s retail market compare to the rest of the United States?

Decoufle: In Atlanta, I would suspect that what we see is par for the course. We didn’t get too high in terms of valuations, like South Florida, California or Phoenix, but we still experienced some pretty strong growth. From a retail perspective, I would say that the only negative to Atlanta is that we are considered over retailed by institutions.

From a capital markets perspective, Atlanta still is a highly desirable city. It’s probably not in the top 5, but it’s certainly in the top 15, and while it might go off someone’s list as a buy, it will go on someone’s list as a buy. We like our prospects quite a bit.

SCB: Ruth [Coan], from a retailer’s perspective, what retailers are we seeing active in the market, and who is coming here?

(left to right) Ruth Coan, Steve Wathen, Bill Read, Hazel Dennis and Jay Goldstein.

Coan: There are two areas of success. The higher-end retail is still thriving, the Saks Fifth Avenues of the world seem to be doing well, and also the discounters are doing well  —  Costco showing good sales volume, Target doing alright, the Burlington Coat Factories of the world, the Belz Outlets of the world — all really very much looking for opportunity and expansion.

Uttenhove: I would agree with that. To compare Atlanta just from a sales standpoint, everybody is flat or impacted. For the most part, we do have the benefit of being in a strong market — it is continuing to grow from a job standpoint. There are retailers looking at this as an opportunity. There are some retailers that haven’t been able to enter the market, so this is an opportunity here to make better deals, to be a little more flexible, that kind of thing. There’s still a lot of interest in Atlanta.

SCB: Bill [Read], since you’re one of the bigger landlords in the area, what do you see in terms of leasing?

Read: There’s no question there’s softness in the market. I think that’s countrywide. Atlanta has always been a must have for every retailer. Even if we’re over retailed, if you’re going to launch in the Southeast, you’re going to start with Atlanta, then you’re going to go to Charlotte, then you’re going to go marching down to Florida. I think that there’s always opportunity here. I think Developers Diversified is fortunate. A lot of our centers are high-barrier to entry areas where they are well located, best in class properties. We don’t like getting a box back. We never enjoy that, but we’re prepared for it. If a box comes back, there’s probably somebody that hasn’t been in that market that wants to get in that market. Instead of going to a new development where that person’s probably having higher requirements to get pre-leased or higher thresholds on returns or more scrutiny than they’re used to, they can go to an existing space.

We’ve had a good 10 years. With all the cycles there comes opportunity, and retailers are seeing an opportunity here where maybe they’re not doing as many stores as they would ordinarily, but they’re still building stores. Dollar Tree and a host of other people, like Ross Dress For Less, haven’t scaled back one store because of the economy. They’re still doing well, and if an opportunity arises where they can get into a center — maybe not the rents we’re used to getting, but with good credit — we’re going to do those deals all day long.

SCB: Peter [Pelt], as another strong landlord here, how do you see the market for tenants?

Pelt: Like Chris [Decoufle] alluded to, there are submarkets that are still good, there are some that aren’t. If you’re staying with the top one or two retailers in any given use category — i.e. Kroger, Publix, Wal-Mart, Target — we’re still seeing decent demand there, and the growth is there. The timelines have slowed a little bit, so what we have in the pipeline today may take 2 years, which maybe is a little more than in the past. Leasing has been soft, softer than we would like it. I think the real problem is once you go to the outlying markets, the secondary and tertiary markets, that’s where we see difficulties in terms of cap rates from the investment side and big box vacancy. By and large, it’s going to be an interesting year or 18 months trying to find the right product mix and the right anchor tenants.

SCB: Kris [Cooper], how does your practice see the Atlanta market?

Cooper: It’s a challenged market for investment sales right now. Clearly, there are opportunities, but you really have to pick and choose what you’re working on. A year ago, it was a no-brainer to take a Publix-anchored center to market and get a 6, 6-1/4 cap, where today there’s no price points that say how we decrease price, increase cap rates, but it’s happened. That same center may be  6-3/4 to 7-1/4. It’s challenging to tell an owner that the same property is worth significantly less, potentially, than it was 6 months or 12 months ago.

Until the credit markets come back, until there’s more debt available for refinancings or new financings, it’s still going to be a challenged market. Clearly, there are opportunities for trophy deals that don’t need financing, assumable deals that you can walk into good rates.

(left to right) Joel Murphy, Peter Pelt, Bob Shapiro and Ruth Coan.

Murphy: I agree with Ray [Uttenhove]’s comment. When you get into this kind of environment, and most of us have been through this environment before, you definitely see a stratification on the investment side, and you see it first on cap rates. “A” product holds its cap rates pretty well — same thing on new developments, same thing on existing properties. The well-located properties are doing well, but there’s still softness all the way around. I’m really glad we started The Avenue Forsyth when we did. I’m glad that we didn’t start it 12 months later. I wouldn’t have wanted to come out with a $145 million project today. We made that conscious decision last year to pull back and delay a couple of projects for a year. We went back to our landowners and renegotiated our options and said, we have tenant interest but not enough to move forward, so we’re going to go back and extend our options and sign the title and hopefully we’ll be bringing this thing to the market in 2010 vs. late 2008 or 2009.

If you’ve got sales history on a center, and it’s a solid center, there is tenant demand, and there’s really not much price refusal.

SCB: Are you seeing that with your Avenue projects here in Atlanta?

Murphy: We are, and yesterday was the ninth anniversary of The Avenue East Cobb. We’re now getting to some of those that are old enough that we’re having to negotiate the renewals, and we’re seeing different price spreads, which is nuts, even in today’s market.

SCB: Steven [Cadranel], Ben Carter has a fairly large development going on in Buckhead. Do you want to speak to the market there?

Cadranel: We’re still seeing good demand for our product [The Streets of Buckhead]. We feel like we’re definitely coming into what by some retail categories might be an overbuilt market. From a luxury standpoint, we are an underserved market. We’ve been very successful in luring new retailers from Europe who otherwise are only found in New York, Los Angeles, Chicago and Boston, who very much want to serve the Atlanta market, but just haven’t had the opportunity. Unfortunately for those retailers, their growth strategies don’t include 44 stores a year, and they are having to make the challenging decisions that a lot of mall-based retailers aren’t. They’re able to look beyond is wealth on the horizon and stay the course with our project in Buckhead.

We’re about 50 percent pre-committed already to date — not bad for a couple of holes in the ground trying to move forward. We’re very pleased with the activity.

SCB: Tell us a little about The Streets of Buckhead for those who may not be familiar with it.

Cadranel: It consists of Phase 1 and Phase 2. Phase 1 is four city blocks. It’s driven by a luxury retailer at the ground level. About 360,000 square feet in Phase 1. Above that retailer, on one block we’ve got a multifamily development for-rent. Fortunately we are working with the best in category, whether the retailers we’re working with or the development partners we’re working with. Wood Partners is coming forward with CB Richard Ellis to sell the multifamily towers. They saw this market coming a year ahead, so they always designed that multifamily as a for-rent product as opposed to a condominium product. They’re seeing more success in capital markets today than a lot of the condominium developers are. They’re excited about their progress. Then we’ve got a hotel on Peachtree Street above retail, a 102-room boutique European-style hotel with a small section of condominiums at the top. But again with an extra application of condominiums; it is unique. We’re very pleased with that. It’s not easy to bring a new hotel into this market.

Plans right now are to open the first phase of retail in November 2009, so every day matters. Nobody’s making it any easier for us, but the retailers that we are tracking are definitely among the most sought-after, certainly, in the Southeast in this country, and in most cases, the world.

Schear: If I could just pick up on what Steven [Cadranel] said for a second. I think one of the things that we’ve seen in the last few years is a real recognition of Atlanta nationally. Everybody in Atlanta thinks everybody knows where Atlanta is, but I’ve been traveling for business in Europe, and everybody doesn’t know where Atlanta is, but they’re starting to. The airport has been a huge success. The international flights that Delta has — we underestimate the power of that. A number of years ago, Steven [Cadranel] couldn’t have gone and gotten the international tenants anywhere in Buckhead. I doubt you would have been successful because people weren’t familiar with where Atlanta was located.

Cousins’ property at Terminus is a good example of where there’s great diversity in restaurants, and there are a lot of other restaurants in Atlanta that people go to in all sorts of segments. There doesn’t seem to be a shortage of creative deals in town. Atlanta’s really grown up a lot, and that’s a great story. On the investment side, 3 or 4 years ago, people would go, where is Atlanta? Now everybody’s in a rush to do business in Atlanta. It may not seem like much of a difference, but it’s a really big difference because there are a lot more buyers in the Southeast than there were 5 or 6 years ago, and that’s ultimately going to be positive for everybody, particularly for the people who are in sales because more people want to invest in the Southeast.

Decoufle: The sales volumes in Buckhead are just shocking. Living here, I don’t think that we sometimes get the scope of the sales we have here. About 40 percent of Lenox Square’s sales are to out of town visitors.

Cadranel: I’d like to add to what Chris [Decoufle] and Abe [Schear] said because I agree with all of it. What’s also been an interesting aspect of our development in Buckhead is just how recognized within the international community Buckhead actually is. It’s really surprising to us because as developers, we’re all used to carrying our bags — we’ve got our maps and our graphics and our psychographics and all that goes with that. We start with our sales pitch on the real estate and from there we go to vision and intent.

To a retailer, in Buckhead, they say spare me the map and the demographics, I know retail, I know Buckhead. You may not see my store in Buckhead, but I’ve been doing business in Buckhead for 20 years. You’ve been buying my product at Saks, you’ve been buying it at Nieman’s, you’ve been buying it at any number of boutiques. All of these luxury retailers can tell you who their Atlanta customer is, the last time she bought their product, the last time she shopped their stores in New York. For them, it’s not a question of is Buckhead the place to be and is Atlanta a market they can do very well in, but for them it’s always been about, show me your vision, show me what it is you’re going to be able to bring together. I’m more of a street retailer, but I couldn’t afford to go to Buckhead and be the first storefront and hope others would follow.’ That wasn’t going to happen here.

They’ve been waiting for this to happen for a long time. We have been able to put together the synergy of parking of vision of mixed-use hotel and multifamily, it’s what they’ve been waiting to see for some time. These retailers know the volume that they can do in Atlanta already. They’re telling us if they can’t do $1,500 to $2,000 per square foot, they’re doing something wrong.

SCB: Joel [Murphy], tell us about the leasing at Terminus a little bit. It’s been opening for the last couple months.

Murphy: Terminus is not your traditional retail. That’s obviously a pretty big corner [Piedmont Road and Peachtree Road]. It’s not just the kind of place where you’d say let me just go put a store there, so it’s been kind of a different retail opportunity, primarily restaurants.

Obviously we’re phasing, and we’re building our second office building now, just finishing the condominiums, which are opening at the end of this month [August]. But the restaurants, the whole idea there was to create a menu of opportunity for people. They could come, and the idea — is when we do Phase Two, just the ones we’ve recently announced Cantina Laredo and Three Forks — is that you could come to Terminus and, you park and say I’ll see what mood I’m in, when we have those all in one place. It’s primarily restaurant-driven, and the idea is not just restaurants for those office people. If you walk around Buckhead, and hopefully we’re going to get there as a city, and when we got Chick-fil-A to do the non-drive thru walkup, that was kind of a recognition that maybe us Atlantans can figure out that maybe it’s OK to walk, and it’s not dangerous or scary.

We’re doing a project at Emory University. The first phase, we can do 90,000-square-feet of restaurants. There’s a lot of people that work there, and there’s just nowhere to go; it’s very underserved. It’s hard to imagine that you have an underserved spot that’s right there, so the retail demand is good for that opportunity.

What we’ve also done downtown with 191 Peachtree St. and some buildings next to it is to try to create a restaurant district. People are recognizing that us Southerners really do like nice things. We can eat nice food. It’s a recognition of the city growing up. These urban opportunities are there because the people are already there and with the housing market declining, you don’t have to sell on the future rooftops.

SCB: What is the city doing to help the vibrancy of downtown?

Murphy: They’ve been great. The obvious ones are the Ambassador Force that is out there, and one of the buildings next door to 191 Peachtree is the home of the Ambassadors. If you walk around downtown, the Ambassadors are great, they’re helpful, they’re friendly. It’s incredibly safe down there. I feel safer or as safe walking around downtown as any place in Atlanta. So the city’s obviously felt very good about that.

Another thing we’re going to be able to work out with the city is valet parking right on the street.

SCB: Brian [Leary], can you give us an update on what’s going on in Atlantic Station?

Leary: We’re real happy to open up H&M, the first flagship store in the Southeast. It’s about 25,000 square feet. A couple people camped out to get in. I think we did about $1.5 million in sales over the first 3 days, so that was a good start. It’s definitely been a great draw for traffic to the entire site. Now we’re really able to look at a few deals a little closer. We have a couple big ones out there that we’re going for.

We have some work going on out there, upgrading some of the buildings and changing the streets. The movie theater continues to do well. Regal tells us it’s one of the top in the country.

(left to right) Ed Allen, Mac McCall and Ray Uttenhove.

SCB: Ed [Allen], can you tell us about the projects you’re doing in Atlanta?

Allen: It sounds like we need to be in Buckhead. Our projects tend to be more infill type of projects, smaller, I would say. But we continue to see a lot of restaurant interest, I say a lot in relative terms. If we could park all the restaurants that wanted to be in the centers, I think we’d have a little easier time. And much like Joel [Murphy] expressed, shopping habits and dining habits do seem to be get in your car, drive to a location and decide which five or six restaurants or places you want to shop at. Our Suwanee Town Center project is a good example of that, and we’re working on additional phases for that, and restaurant interest still continues to be strong.

SCB: Harold [Schumacher], how is restaurant activity in Atlanta?

Steven Cadranel and Harold Schumacher.

Schumacher: I think I’m not working hard enough. It’s encouraging to hear all these restaurant tales. Somebody asked me earlier today how are restaurants doing, and I said, if you ask most restaurant owners how their business is, they’ll admit sales are 5 to 10 percent down. If you put some liquor in them, they’ll probably admit that sales are off 10 to 15 percent. Even though there’s a flattening out, fundamental patterns haven’t changed. People continue to dine out. People are moving around the market. They may forgo a luxury experience on a regular basis but still go out on a Friday night for pizza. We’re seeing demand for restaurant space from downtown to the suburbs. We have some groups that are looking at this as a time of opportunity. Logan’s Roadhouse, for example, is probably a second-tier restaurant company. It’s small in this market, not well known. They are able to go in behind a Chili’s and pick up a site, so that helps. Monkey Joe’s is a fill-in, it’s 15,000 square feet, but it’s local credit. We had developers who wouldn’t talk to us a year ago, and all of a sudden a 15,000-square-foot tenant doesn’t look so bad to most developers.

We’re still seeing a lot of demand at the smaller level fast casual. Joel [Murphy] mentioned downtown. Downtown is at the cusp of — a lot of us at this table have lived here for a long time and have heard, oh Atlanta’s almost there — downtown has all the ingredients in place right now. It’s a shame it’s emerging in the midst of an economic slowdown. Legal Seafoods is opening this week, BLT is opening at the W — we’ve got probably 800 or 1,000 luxury seats dumped into downtown Atlanta in a short period of time.

We’re not seeing a big fallout from outlot prices. There’s still enough demand for prime outlots. You get out to the suburbs, and if there’s a falloff in land prices for the end users, it’s maybe 5 percent, it’s not a dramatic 20 percent falloff because there’s enough infill loaded with banks and guys with synergistic centers. I think land prices affect it.

SCB: How do you see activity intown versus the suburbs?

Schumacher: In the last month, we’ve been to four new restaurants, and they’re all busy. But if you think about it, it’s two different worlds. Intown, there’s people out at 9 on a Tuesday night because they’ve been to the gym — they’re not married, they don’t have kids — they go to the gym and work out, they get done at 7:30 or 8, then they go out, and they’re out to 10, 11 on a school night. You go to the suburbs, at 8:30 you can roll it up. You go to Roswell, you go to Alpharetta, and that’s the problem. There’s just not that weekday activity outside Interstate 285. Now that we’ve become a city of 5 million people, all these new places are busy. It dawned on me that there’s probably 10,000 to 20,000 hardcore restaurant goers. They don’t play golf, they don’t scuba dive, they go to restaurants. They just move in a flock from new place to new place. The good news is that an international visitor, they can pull out a Zagat survey and find 20 restaurants that they want to go to that Atlanta is known for, so it’s not like having two or three, so it’s helped round out the attractions.

SCB: Have you seen a lot of new concepts coming to town?

Schumacher: There’s always new concepts. I’m not sure there’s that many new niches. I mean there’s a dozen Jimmy John’s, Jersey Mike’s, Subway, Quizno’s of the world. You could fill up every shopping center in town with 12 sub sandwich giants. Then Fresh 2 Order will emerge, which is clearly a differentiating factor. There’s a group from Toronto that wants to come here with an Asian noodle concept. I’m not sure there are too many new frontiers to conquer.

Coan: I feel before we move away from the downtown and Midtown area, it really would be worthwhile to focus on some of the cultural nodes that are also helping solidify, stabilize and improve the acceptance of some of these areas. Centennial Park in particular, it seems to me, is really coming into its own. It started slow, but we have several different additional museums or venues that are coming. The Center for Civil and Human Rights is a wonderful addition to Centennial Park and will offer credibility to that area and draw a large number of people regularly to that area for study as well as other kinds of cultural growth.

I like the fact that there’s a lot happening there — The World of Coca-Cola, the Patriotism museum also moving to that area. I think it’s stabilizing and expanding, and we’ll see more and more happening there. Of course, the Georgia Aquarium being one of the first to come to that area. That is helping with the development of additional restaurants in the area and tourism in general. It is also bringing people from the suburbs to the downtown area. In the Midtown area, the High Museum and the symphony, and again the growth that you get and the accolades that you’re getting for some of the performances that are offered in that area. Even in some of the suburban areas where you have the Cobb Energy Centre, which is going to be attracting a variety of different services, things like the ballet and the opera, so a lot of different cultural things that were not available, which give sophistication to the community.

SCB: We also haven’t mentioned the Midtown Mile Project (see sidebar on Page 176).

Murphy: The other demographic change that you didn’t touch on is Georgia State University. Under Carl Patton’s leadership, it is extraordinary. If you see how that university has pulled out of their concrete walls that they had on that really south end of Five Points. They’ve bought buildings all over the place for the expansion of their dormitories. If you come go down the ridge down toward Five Points during the day, there are kids everywhere.

Schumacher: It’s also driven one-off restaurants. If you go out Edgewood Avenue, go out Auburn Avenue to the backside of Inman Park, you’ve got Rathbun’s, you’ve got some dynamic, small restaurants — these are not name brand. Go out Edgewood Avenue — there are probably a half-dozen interesting restaurants from Georgia State to the backside of Inman Park. Those are being driven by the fact that there are so many people downtown on a regular basis. Go up DeKalb Avenue, all the residential and the Old Fourth Ward — those are all areas that are really on fire right now and are bringing amenities along with them.

(left to right) Bob Shapiro, Ruth Coan, Steve Wathen and Bill Read.

SCB: Ruth [Coan], how is the downtown Macy’s building project going?

Coan: The ownership of the building, the prior Macy’s building, has created condominiums of the space and sold the first three levels to an Atlanta-based group. Their objective is to provide, for want of a better term, a type of Faneuil Hall concept, where there will be small restaurants and small retail that will open up the building to the outside. They’re just developing that concept.

Murphy: We’ve been in touch with them just because we’re across the street, and we’re active supporters of downtown. We’re very supportive of them. We hope they pull it off. It’s in the development stages; they’ve got a leasing team that’s out talking to clients.

SCB: Bob [Shapiro], how do you see the Atlanta market as a retailer?

(left to right) Peter Pelt, Bob Shapiro and Ruth Coan.

Shapiro: We currently operate five stores here in the Atlanta market, which has been the case for almost 3 years, and, at least for the time being, we believe that we have pretty much saturated those submarkets in the Atlanta area where we should be. We do think that in the future there will be additional opportunities, but as an almost exclusively mall-based specialty retailer, we really do look at markets first from the standpoint of where are those strong regional malls that have the dynamics and characteristics we typically look for, which is higher income, higher educational levels and so forth.

Our five stores here in Atlanta continue to perform very well. We are receiving strong comp increases from each one of them. Our Phipps store continues to perform very well. We’ve seen, actually nationwide for our concept, continued strong comp store growth. This year, we were up almost 7 percent. We’ll open 26 new stores this year nationwide, and thus far every new store that we’ve opened has performed extremely well coming out of the box.

We have a number of dynamics that are affecting our sales that are not necessarily true to specialty retail in general. The biggest of which, of course, is that there’s been so much publicity and talk about the benefit of tea and an awareness of tea that has grown over the last couple of years that has allowed us — as the largest specialty retailer of premium loose leaf tea in the country — to be able to grow at the rate that we have. We are up from 17 stores in 2004, to this year we’ll have close to 100 stores. Nationwide our plan is to open 40 or 50 new stores next year, and 60 to 70 new stores in 2010. We continue to see strong growth opportunity.

SCB: As you travel around the country and talk to other retailers, what kind of a feeling do you get as far as the Atlanta market?

Shapiro: I think it’s obvious from what’s happening in the Atlanta market — Carter and Cousins and the types of retailers that I generally talk to — there continues to be a strong awareness of the strength of the Atlanta market, particularly for higher-end retailers. But again, I talk primarily to national chains, not to international retailers. There’s been such a pull back from what had been many of the leading women’s specialty retailers that many of the things that they’ve been talking about doing even 6 or 8 months ago are being pulled back as far as their growth is concerned. That applies to Atlanta as well as practically every other market.

(left to right) Bill Read, Hazel Dennis and Jay Goldstein.

SCB: Do retailers seem to be getting a little more aggressive in regard to opening stores?

Read: I don’t know if they’re getting more aggressive, but they haven’t stopped. Dollar Tree is still developing 300 stores a year, Ross Dress For Less is still developing 170 or 180 stores a year. Most of the discounters I talk to, even the women’s apparel stores — if you were up 6 percent last year, you’re down 4.5 percent this year, you’re not happy, but the world didn’t end, so you’re still going to look at doing store expansions. The discounters have been very successful.

SCB: Abe [Schear], what are you seeing in terms of leasing? Anything different than years’ past?

Schear: In this market the tenants that are doing deals seem to feel like they have more leverage, probably because they do, which makes getting leases executed all the more difficult. National landlords — we’ve represented a number of them — struggle with the performance of leases. The lease negotiation process is different than it was years ago, when it was much more of a conversation of business. Today, it’s not as conversational. People want to perform deals, and in this market, national landlords don’t want to change the lease format so they can get one deal done when they have eight deals in their portfolio. That’s a struggle.

Landlords, often times, want to let the tenant know that they’re really in a hurry when they’re willing to negotiate, and they’re really not in a big hurry because they’ve been delaying projects.

We are involved in a number of development projects. I just did a development project where we had a drop-dead date of 2013. Five years out for a development deal is a long way out. I was scratching my head on the deal a little bit, but we did get it done. The landlord is renting the very well-known tenant’s name. It’s a creative deal, and they were renting the name for a number of years so we could put it on the development plan without a lot of cost. I haven’t seen that in a long time. Often times, I’m one of the older people, and I feel like I’ve seen most every thing, but I haven’t see that. It’s hard to get deals done, and tenants have a lot of leverage.

Uttenhove: Tenants are very concerned about who is the developer. They want that track record. In the development business, the game has changed. It used to be that if you had a tract of land and an idea, you could get it built. That’s not the case anymore.

SCB: Do you find that if you have competing projects, the deal is more likely to go to the established developer?

Uttenhove: Retailers are often, particularly those that lead developments, looking at developers who have a track record.

(left to right) Kris Cooper, Joel Murphy and Peter Pelt.

Pelt: You’re going to see a lot more joint ventures.

SCB: We had a round table in Charlotte earlier this year, and it was very interesting some of the comments received. A lot of bigger guys are taking over the smaller guys’ developments. Have you had any experience with that?

Pelt: There are a number of longstanding good, solid Atlanta developers who are having equity issues now and are just looking for a partner, which 2 years ago wouldn’t have happened.

Read: That’s also something we’re seeing. Sometimes the big can get bigger when the smaller guys have the ground, but as far as some of the developments across the country, financial markets are obviously stressed right now, so it’s easier for someone like us to come in and help them, and we’re actually seeing more opportunity. It still may be that you’re not going to get off the ground just because of the market, but we’re certainly seeing a higher level of interest of emerging builders looking to us to help them out. We’re seeing a lot more retailers spending more time with a letter of intent.

Abe Schear and Steven Cadranel.

Schear: Bill [Read]’s point is absolutely true on the letters of intent. I think a lot of landlords are being careless with their main tenants. They think they’ve got these deals, but they don’t have adequate substitutional rights. They forget that on a lot of deals, they give you options where they used to not get options at all. It’s pretty unlikely that the 10 tenants you want today are going to be the same tenants you want in 15 years.

Decoufle: We’re seeing very little CMBS defaults right now. That has not gone up a lot. But where we’re seeing a lot of issues is in construction loans. All the lenders are getting visits by the FDIC. They have to explain what projects that have on the book, either developments or land deals. They’re calling us on what the exit cap rates are now. If you’re a lender, and you have a 100 percent cost loan on these deals that started a year ago, you’re takeout loan is at best 65 percent right now. And then you’re looking at what is the cap rate when I develop this at a 7.5 cap, that’s my return on cost. That may be below sales price now, depending on what the development is, and so what’s happening is, and I think you folks are just starting to see a tidal wave, there are a lot of construction lenders out there that are looking very hard at their project, no matter who the developer is, and say, what’s my takedown, what’s this worth. I think we’re starting to see conversations with lenders where folks are going to have to have very difficult but necessary conversations with, here’s what’s going on. I’m not sure if anyone’s seeing this, but we’re starting to see it. It’s very much an opportunity but it’s also an issue.

Murphy: I could not agree more with that statement. That is a huge place where we’re going to be for the next at least 12, probably 18 months. That’s why we’ve taken developments, which typically have not been joint ventures, and moved to change that idea and strategy. We’re talking to everybody; on the residential side, it’s just in major distress, and they’re coming to us because we have capital. On the retail and office side, there’s so much dislocation on all the good projects.

There’s a combination of that force with what Ray [Uttenhove]’s talking about, with the quality developers and the retailers that do want to get projects delivered. It does create an opportunity for people who have capital land expertise. That is why we’ve taken the projects that are our typically non-joint ventures and delayed those. During the interim, our strategy is to do joint ventures with developers because we basically have $500 million to spend right now and go out there and do those joint ventures with developers and deliver those projects.

Cooper: The anticipation of loan maturity defaults is going to be one of the biggest drivers over the next 12 to 18 months. It’s the anticipation of that coming to a maturity, and there’s a lot of nice projects that are in that situation or will be in the next 12 months. It’s going to be more defaults from the loan side, whether it’s maturity versus an actual problem with the property.

Cadranel: Right now most lenders out there are playing defense, they’re not playing offense. They’re not looking for new deals. Whether you’re a retailer looking for a development to perform or you’re a bank looking for a developer to perform, relationships and credibility in this market mean more than they ever have. It sounds trite, but I can remember 18 months ago when for every one of me, I could choose 50 different lenders. Now for every 100 of me, there’s one lender, and they’re being very selective. The markets are out of balance right now.

SCB: Brian [Lefkoff], you lease and manage a number of centers here in Atlanta. Tell us what you see in the market.

Lefkoff: Our management business is thriving. I think they have probably doubled their business in the last 18 months. It’s been a huge success. What we’re also seeing from a third-party standpoint, third-party leasing, is that we’re having companies come to us that normally would not be there. It’s just opened us to sort of help them with their leasing needs. It’s been another growth factor for the leasing side.

Brian Lefkoff.

SCB: On the tenant side?

Lefkoff: The majority of my national tenants, if they estimated up to $1 million in the first year, they’re going to estimate up to 10 percent less than that, maybe 15. We’re getting creative with deals, creating lower rents based upon the sales number, and we’ll go to a regular rent rate, the negotiated rent rate, in the third year. And there’s some flagships coming here too.

One of the things about Midtown and Buckhead is that it’s really spoking out a lot to Howell Mill Road at the West Side and going all the way down to Brick Works. I think that whole thing fed off of this [Atlantic Station], and what you’re seeing over there is more of the higher-end local boutique, the eclectic kind of user going over there. From a Midtown, Downtown, Buckhead scenario, there’s a core, but everything around it is really spoking out. I think that’s a great thing to achieve. And the young students at Tech and State, they’re all living in those developments.

(left to right) Brian Leary, Ed Allen and Mac McCall.

SCB: Brian [Leary], tell us about the West Side a little bit.

Leary: Well, if you haven’t noticed, the West Side is hot. Everyone knows that Bacchanalia moved there. Does that have anything or something to do with what’s going on here at Atlantic Station? Many of you may think not, but 17th Street definitely has kind of opened up the west side, and the stuff that the guys are doing at White Provision is fantastic. I’m excited to see stuff go up every day. Knoll is over there with their furniture showroom. They’re building a bridge to connect over to JCT and Bacchanalia, and Taqueria del Sol’s already over there, so the stuff that’s happening up and down Howell Mill and Northside is really changing in front of our eyes. You’re adding residential density, which you had very early on through the loft developments, but now you’re getting new build on that side of town. You can see how well it’s happening.

The Midtown Alliance does a fairly good job of marketing Midtown. Midtown continues to get bigger, so now that’s west Midtown and Midtown technically goes over that far, and it’s on the maps and everything. We’ve got some good retail density, some residential density as well. You’ve obviously read in the papers and heard what Sembler is looking to do on the corner of 14th and Northside. Northside’s also been identified as a major north-south corridor for the state’s transportation network. Maybe a new interchange down at I-20, giving some relief to the 21 lanes of asphalt that are out the window here that tend to start getting backed up around 3 p.m. I think the West Side is a good place to be. That’s one thing we’ve noticed, that Northside Drive is a real important conduit for us. People that work near there, they can come to shop. It’s like another Buckhead, and people like that access to avoid some of the congestion in other parts of town.

SCB: There’s still a couple of areas for possible development that we’ll probably be talking about more in the next few years. The GM plant in Doraville, the Ford plant in Hapeville and the military bases. Does anyone want to speak on these?

Leary: When we did Atlantic Station, a lot of people said you’d never find 140 acres in town like that. Well, GM’s 165 acres, basically at Spaghetti Junction and the Ford plant in Hapeville. It’s rare to find these big parcels of land. If you can get it at the right price and in a down market both of those are at the right price, it gives you a great opportunity to create some critical mass. Each one of them has some challenges, whether it’s local access, local dynamics or regionally, but that’s something real rare for Atlanta and rare for the development business.

Coan: The ones that you mentioned, benefit, most of them, from having very direct access to MARTA and other public transportation. That’s going to really facilitate those developments and enhance them, with the Beltline really being one of the other connectors for all of these. I think that when we talk about what’s happening today, you really can also be talking about what’s going to be happening in 3 years or 4 years, and I think that there’s a lot of excitement in the air for some of these very large projects. Atlantic Station took how many years? Ten, at least?

Leary: We’re still only about 40, 45 percent built, so we’ve got a ways to go.

Coan: These are projects that are not going to occur overnight that they are really going to change the whole way that our entire community functions, and they are going to enhance mixed-use and traffic patterns and hopefully diminish some of this cross traffic that we have from one geographic area to the other as commuters try to drive an hour each way to get some place. Hopefully, this is going to help.

(left to right) Steve Wathen, Bill Read, Hazel Dennis and Jay Goldstein.

SCB: Hazel [Dennis], the cover of our Georgia Commercial Properties this month is North Macon. Tell us a little about that market and why it’s so hot right now.

Dennis: The reason it’s so hot is because it’s the third largest combined district in statistical history in the state of Georgia behind Atlanta and Augusta. To be that big, it only had one shopping center. The others in Augusta and Columbus, they had two good shopping districts. Macon only had one. And that district was in the area where the growth was moving away from, and income, if it was over there, it moved away also to the northside.

This area on the northside of Macon makes a lot of sense because it allows the retailer to catch interstates 75 and 16, whereas the other shopping district that was on Interstate 475 only caught local traffic. The addition of the Bass Pro Shops acted as a catalyst. Then there was enough density of high income housing in that area that it all sort of came together all at one time. Jim Wilson & Associates had good fortune in starting their 750,000-square-foot open air center ahead of this curve of slowdown. While they’ve seen a little bit of effect to their shop spaces, it’s taken a little bit longer than they thought to get 100 percent leased, it’s still proceeding well. It opened in March, and from what I understand, it’s performing very well. They were ahead of the curve.

SCB: How’s the retail space there? Is there still space available?

Dennis: There is some retail space available in all of the quadrants that they actually have open. The ones that have Talbots, Chico’s and Coach, and the ones that have Limited, all of those price point areas still have some vacancy. But they have several of those that will be occupied this fall by Belk, Circuit City will start construction, also DSW will be open in October. Then you have our project, which is coming online in 2010 with a major mass merchandiser who has had his name committed to the project. We are fortunately far enough out that our project has been very successful. We are over half committed already on our project.

SCB: Are there other areas of Macon that are active like that?

Dennis: Fresh Market is opening in the next couple of weeks in Forsyth. It’s halfway between 75 and 475, so that’s perfect for them. Publix has just bought land and has started construction just across the intersection from our project. There’s a development south of town at Hartley Bridge, and that’s an underserved market. It needed the grocery stores and fast food, so you have a development down there that’s going a little bit slower in today’s climate than it was.

Read: We own the other shopping center, and our center’s just as strong as it was 2 years ago or a year, with maybe 1.3 million square feet of retail coming in. Macon’s gotten to be a big town; it’s more than a one-store town. Retailers that came there were successful. The project we brought them, they determined they could make this a two or a three-store market. I don’t think they’re open another store because they can box themselves too much. It’s been a very good market for us. Macon over the years has been a little bit stagnant, so it’s nice to see new retail, new growth, new jobs coming to that market.

Cadranel: I hate to change the discussion, but we’ve got condominiums — 700,000 square feet, in Columbus, Georgia. We’ve developed those for the last 5 years, and it’s going to be extremely successful for us. We probably have two or three shop vacancies. Are the second-tier markets, the Columbuses of the world and the Macons of the world are holding up better maybe than the urban markets?

Read: Steven [Cadranel], we own the other center, Bradley Park, right down the street from you in Columbus. We’ve added 1.7 million square feet, and I have two vacancies. Goody’s, which is a very good example of someone who exited the Atlanta market, did not close Columbus. I was there yesterday talking to the store manager, and the store there is Number 1 out of nine in Columbus, and they’re very, very happy. Sometimes what happens in Atlanta is more of a distribution problem, and retailers close down in a core market but not in a smaller tier market.

We’ve been talking so much about the intown area. There are places like Cumming, Newnan, Lithonia that are either red hot or just plain hot, and they’re 30 miles from here in either direction. Cumming has had a lot of growth, but there’s also a lot of infill to go. To that end, Birmingham’s been doing well. We own a number of properties — over 2 million square feet in Birmingham, about 1 million square feet up in Huntsville — and they have done very well. Our leasing activity, demand there is strong. Our pipeline is strong. That’s because they have good properties. I think Birmingham is having maybe not as tough a time in certain areas.

Christopher Decoufle.

Decoufle: We’re working on projects in all those markets right now, and it would be nice to be able to say, hey it’s convenient, second-tier markets are holding up, but it’s just like anything, it just depends on the market. Northern Alabama is an absolute well-kept secret. The wealth in Birmingham is staggering. If you look at their underlying economy, steel, all the auto making, it is a very powerful story in northern Alabama. In Columbus, you have Aflac, Total Systems and Fort Benning. It’s fairly staggering for a small town what it has going on there. Savannah with the tremendous port capacity that they have. If you look at the whole eastern seaboard, Savannah is very well positioned, from a port perspective. And in Savannah you have something that you don’t have in a lot of other markets — scarcity of land. Chattanooga is getting a $1 billion Volkswagen  plant. That’s a fairly amazing thing. Every market’s a little bit different, but there are some things happening that are unique. Looking at all our different projects, I will say that the retail sales are not as strong in the second-tier markets, but there are exceptions. And the rental rates aren’t as high. It’s a very interesting story.

McMillan: Our whole basis of our company is secondary markets — Greenville, Pensacola, Knoxville. We are acquiring properties and actively looking at all these markets. As we are cautious as everybody looking at the retailers, our base in a lot of these deals is 10, 20, 30 percent of what these new developments are in the metro areas, and the Big Lots, and the PetSmart, and the Belk and the Dollar Tree and the Family Dollar are active, and they are rent conscious. We’re seeing very good activity in leasing. The foreclosures are picking up, the defaults are picking up, and there are a lot of people who got into these markets that don’t know how to fix problems. Wal-Mart moves out to go to the new DDR center or whatever. Our specialty is back-filling these assets, and we’re going to continue to look into these markets.

Cooper: Institutional capital has gone to those markets — Macon, Columbus and Savannah. It’s not as much as what you see in a Raleigh/Durham, Atlanta, Miami, Tampa, but it’s there, and I think you’ll continue to see it. It’ll help fund one of those projects the larger developers are trying to get underway.

Cadranel: Jacksonville is another strong market. We have a big presence there as well. It’s a very successful market. It’s a market where, I don’t know if you’d call it second-tier necessarily, but it was a market that you could look at 4 years ago, 5 years ago, and believe that it had all its retail needs met. In fact there was a level of retail, the higher-end level, that was very underserved. In Jacksonville, our lifestyle/power center is 3 years old. We’re an open-air center at $700 a square foot. So there are opportunities in any of these markets. Jacksonville has certainly been one of those overlooked dynamic regional cities for us.

Pelt: We’re introducing the first Whole Foods there.

©2008 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.