In the first three years of the current decade, "staying alive 'til '95" was the primary objective of many players in the Atlanta commercial real estate market, as this metro area struggled through the recession that also wreaked havoc on other major markets throughout the nation.
Now that 1995 is nearly half over, those who have survived are enjoying an Atlanta marketplace that has recovered with a vengeance. Available quality office space, once in abundant supply thanks to the overbuilding of the 1980s, is now getting harder to find. Demand for industrial product is outstripping supply. Rents and occupancies are rising in the local apartment marketplace; meanwhile, retail developers are scrambling for sites on which to build big box-anchored power centers. A number of factors have contributed to the Atlanta commercial real estate market's recovery of the nation's economy has certainly been of major importance. Activity generated by the upcoming 1996 Olympic Games, now just a little more than a year away, has undoubtedly had positive effects.
A mature and well-developed metro transportation infrastructure, which includes a strategic location at the junction of three interstate highways, has always been a major influence on Atlanta's economic well-being. Hartsfield International Airport, one of the nation's busiest, has just completed a new $305 million Concourse E to service increasing levels of international air traffic. The airport link of the Metropolitan Atlanta Rapid Transit Authority (MARTA) rail system, established in 1988, brings Hartsfield to within 30 minutes travel time of Atlanta's core commercial area, with system expansion slated to connect with points in its affluent northern suburbs during 1996.
A diverse job base, anchored by services, retail trade, government and manufacturing employment, rounds out the list of Atlanta market fundamentals that, while not always completely insulating the area from periodic slumps in the national economy, typically serve to mitigate their effects. This diversification has also proven attractive to many real estate investors over time.
Marcus & Millichap Real Estate InvestmentCompany, the nation's largest investment real estate brokerage firm, is making a huge commitment to Atlanta and all of the Southeast by expanding operations new offices in Atlanta, Miami/Ft. Lauderdale, Tampa/St. Petersburg and Charlotte, N.C. "Developers, pension fund managers, REITs and insurance companies are moving into these areas and are seeking a broad range of property types, such as multifamily, office and industrial," says Bernie Haddigan, Southeast division manager. "The entire Southeast area has much of what real estate investors are looking for -- new housing starts, low vacancy and appreciating values."
"I've been lending in Atlanta for years," says C. Patrick Nolan, executive vice president of Bethesdal Md.-based Suburban Mortgage Associates Inc., a mortgage banking firm particularly active in the area's multifamily market. "The best thing about Atlanta is the diversification of its economy. Compared to a lot of other markets, it does well -- even in the worst of economic times."
Bring on the awards
The accolades heaped on Atlanta have been rolling in. A fourth-place finish in FORTUNE magazine's latest ranking of the "World's Best Cities for Business"; first place in World Trade Magazine's "Top 10 U.S. Cities for Global Companies; the best place to own a business (Entrepreneur Magazine, 1994); the top market for office, retail and industrial investment (CB Commercial National Investor Survey, 1994, and Kenneth Leventhal Co. Real Estate Investment Market Study, 1993); the best city to locate a new facility (Lou Harris International CEO Survey, 1993); and the nation's second-hottest real estate market Emerging Trends in Real Estate by Equitable Real Estate Investment Management and the Real Estate Research Corp., 1994).
While diversification is a major positive factor, its importance is exceeded by the absolute amount of growth in the Atlanta regional economy. According to noted economist Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University, the 20-county Atlanta MSA (metropolitan statistical area) added 96,800 non-agricultural jobs to its employment base in 1994, tops among metro areas throughout the nation. Job growth in 1995 and 1996 is projected at slower, but still impressive, levels of 77,900 and 76,000 respectively.
A significant component of Atlanta's 1994 job growth was the total of 223 business relocations and expansions into the Atlanta area, the largest annual gain since 1985, according to a recent report by the Atlanta Chamber of Commerce. The economic impact of the upcoming 1996 Olympics, mostly construction-oriented and estimated at around $5 billion, has already been largely realized, according to Ratajczak. Major Olympic-related projects currently in various stages of development, exclusive of actual Games venues themselves, include the massive Centennial Olympic Park, a 60-acre, $100 million downtown Atlanta gathering place"; an adjacent Olympic entertainment park to be underwritten by the Coca-Cola Co.; and a $10.9 million Peachtree Street streetscape improvement project, part of nearly $60 million worth of planned improvements to pedestrian corridors linking Olympic activity centers and MARTA rapid rail stations. Plans have also been announced for two new downtown hotels slated for completion by the Olympics, with the developers still in the process of pursuing financing; meanwhile, a $35 million meeting and exhibition center addition to the Hyatt Regency at Peachtree Center is under way.
Office market tightens
Strong demand, coupled with a lack of new construction in the past several years, has made larger blocks of available Atlanta office space a precious commodity, according to Grubb & Ellis office properties vice president Deming Fish. "I don't see the market changing anytime soon," he notes. Although some new buildings are coming on line in the future, "there won't be any new space on the market for at least the next year and a half," according to Fish. "If an office tenant has a major requirement, say in excess of 20,000 sq. ft., that is coming up in the next year," he adds, "they had better be looking for a place to land today, because there are very few opportunities out there right now."
"There are only about six or seven real alternatives in the market for the 50,000-plus sq. ft. user, and those will be gone soon," says Samuel G. Friedman, regional president of The Galbreath Company. Tenants looking for Atlanta office facilities "have to be extremely creative these days," he notes. "Some may have to lower their expectations as far as the kind of environment they want. They may have to go to locations they would not have considered five years ago, and/or split their operations among several buildings."
Atlanta-based Richard Bowers & Co. president Richard Bowers is a bit more sanguine about the situation. "Atlanta still affords some opportunities," he notes. While extremely large space users are going to have a tough time coming up with existing space outside of the central business district, "There is still a reasonably plentiful supply of available space in most submarkets." There are also "a few subleases floating around that can work," along with the build-to-suit option, says Bowers. All in all, he adds, "while the market is certainly becoming more of a landlord's market, I also think that Atlanta still offers good value for the office user, and people that have business needs here will not find the current rental rate structure or availability situation unworkable."
According to a just-released report from Richard Bowers & Co., the 91.3 million sq. ft. Atlanta office market was only 10% vacant. Quoted rental rates averaged $17.76 per sq. ft., led by a $20.06 per sq. ft. rate in the Buckhead/Lenox submarket. Only 140,000 sq. ft. of space was added to the market in the first quarter of 1995, the 60,000 sq. ft. Kingswood I building, and the 80,000 sq. ft. 4800 North Point Parkway building. "Users that need a significant amount of Class-A space in Atlanta are going to have to took downtown," says Mike Shelly, president of The Parthenon Group, which has assumed leasing responsibilities for downtown's massive 2.4 million sq. ft. Peachtree Center complex. "They are going to see all the positive activity in the area, and I think they will be pleasantly surprised."
According to Grubb & Ellis, major lease transactions consummated during 1994 included 287,000 sq. ft. taken by the Federal Deposit Insurance Corp. at Midtown's One Atlantic Center; 140,000 sq. ft. of space at the Cumberland/Galleria submarket's Wildwood development by Coca-Cola; and 90,000 sq. ft, by Kaiser Permanente at Piedmont Center in Buckhead/Lenox.
Already in 1995, the Atlanta office of Koll represented Digital Equipment in the lease of 200,000 sq. ft. at 5555 Windward Parkway West to Northern Telecom. DEC owns the building and the surrounding 102 acres, which is located at the southwest comer of Windward Parkway and Georgia 400 in Alpharetta.
Coming out of the ground
Some relief for the Atlanta office space crunch is on the way. An early-summer 1995 groundbreaking is contemplated in the Buckhead/Lenox submarket for the 24.story, 540,000 sq. ft. Monarch Tower, according to Clark S. Gore, senior vice president of COMPASS Management and Leasing Inc. "As the market tightens and rents continue to escalate, this project becomes more of a `home run' every day," says Gore.
Another large project edged closer to reality in recent days, as Faison successfully obtained approval of its application to increase the density in its Concourse project by approximately 1.5 million sq. ft. Concourse, a 63-acre mixed-use development containing 2.1 million sq. ft. of office space, the Concourse Athletic Club, a Doubletree Hotel and KinderCare Learning Center, is located at Georgia 400 and Interstate 285. Faison plans to construct three additional high-rise buildings on the site. Construction of Corporate Center Three, the first of the three proposed buildings, will commence once the building is 50% preleased. This would mark the first construction in the project since the second tower, Concourse Center Six, opened in October 1991. Overall occupancy for the project is about 96%.
Along the Georgia 400 corridor, ground has been broken for a six-story, 132,000 sq. ft. building near north Fulton County's North Point regional mall by Atlanta-based Cousins Properties Inc., with a late 1995 completion date set.
Also along this growing corridor, CARTER has just announced plans to break ground in the second quarter on a 100,000 sq. ft. speculative office building on an eight to 10-acre site it owns in the Royal 400 office park on North Point Parkway just one mile north of North Point Mall. Atlanta-based Thompson, Ventulett, Stainback & Associates is designing the building as a four-story "campus-style" structure with surface parking. It is scheduled for completion by summer 1996.
"We considered many issues before making the decision to develop a speculative building," says CARTER president and CEO William A. Mitchell Jr. "We believe this is the right time and the North Georgia 400 corridor he right place."
"The decision (to develop) in this particular location is consistent with Carter's development history," says Bradley Fulkerson, vice president of corporate development. "We have always liked the amenity base of a regional mall. With this site, we have close proximity to the amenities of North Point Mall, plus multiple points of access in every direction," says Fulkerson.
Farther north along the 1-75 corridor, Amli's Barrett project took off last year. "1994 was the most successful year in the history of the Barrett development," says Mason Zimmerman, vice president of Amli Realty of Georgia. "We completed two build-to-suits, finished 15 acres of new infrastructure development and sold more than 40 acres of land in 10 separate transactions for new office, industrial and retail development." More than 1 million sq. ft. of space has been developed in Barrett since Amli purchased the project in 1991.
In the Buckhead/Lenox area, an extensive renovation of 95,000 sq. ft. Lenox Plaza, which will leave nothing of the old building "other than the foundation and the floors" will be completed by midsummer 1995, says David Tyter of the Atlanta-based Wilson & Nolan brokerage and mortgage banking firm. Nearby Lenox Towers is slated to undergo common area and parking deck renovations, "with a goodof money set aside for tenant finish and leasing commissions," adds Steve Proctor, vice president of Atlanta's Brannen/Goddard Co., who will be handling leasing for the project.
In the Cumberland/Galleria submarket, Prentiss Properties Ltd., Inc. proposes to construct a 175,000 sq. ft. office building at Cumberland Office park, according to marketing vice president Bill Weghorst, with some site preparation work slated to begin in 1995. "A new development cycle has begun," he says, "and we will be actively looking for tenants to anchor this new building."
Meanwhile, developers are "dusting off their plans for new projects," in the 18.4 million sq. ft., 93%-occupied North Central submarket, notes Mutual of New York (MONY) Real Estate Investment Management vice president Char Fortune. Severely strained transportation infrastructure in the area is a sticking point when it comes to new development, however.
"MARTA will open two new rapid rail stations in this area by summer 1996," notes Fortune. "But, the big challenge now is determining what kind of additional transportation infrastructure will be available to move people on surface streets to and from the stations. That issue has not been addressed -- and it needs to be."
Late last year, MONY's real estate services company, ARES Inc., assumed leasing and management responsibilities for the Atlanta Financial Center, a 10-acre, 900,000 sq. ft. office complex in Buckhead. The three-building complex is owned by MONY, and in fact MARTA is a significant selling point for the property, since a rail line runs directly underneath the building complex.
In the build-to-suit arena, Technology Park/North has been chosen as the site of a 101,000 sq. ft. corporate headquarters facility by Melita International, a company which provides services and equipment to organizations that manage a high volume of telephone calls. Owned by Laing Properties Inc., Technology Park/North consists of 70 acres in the Peachtree Corners area of Atlanta and is managed and marketed by Technology Park/Atlanta.
Also in the north metro area, Taylor & Mathis has just started construction of a 121,000 sq. ft. multitenant office/distribution facility in its TownPark development, a 250-acre business park in Cobb County. The two-building facility is situated on a 10-acre site and will have leasable space from 6,400 sq. ft. available late this summer.
Industrial demand strong
1994 was a record year for the Atlanta industrial market, "and we think 1995 will be incredible," says Charlie King, president of King Industrial Realty, Atlanta. Tenants "are coming out of the woodwork" and searching for space, he notes, with rents currently rising to the tune of "$0.10 to $0.15 per sq. ft."
The company's fourth quarter 1994 industrial availability/activity report notes a vacancy rate of 11.8% in Atlanta's 286 million sq. ft. warehouse/distribution marketplace, with net absorption for the year topping the 5.5 million sq. ft. mark. In contrast, the 13.5 million sq. ft. service center sector of the market absorbed only 162,848 sq. ft., with year-end vacancy standing at the 12.6% level. There was approximately 5 million sq. ft. of speculative space under construction at the end of 1994, adds King, with some 3 million sq. ft. of new speculative space added to the industrial inventory during the first quarter of 1995 alone.
Strong demand, even in the face of current levels of construction, means that industrial users are finding a very short supply of space throughout Atlanta, says John McDonald, president of McDonald Development Co., an industrial developer with a number of projects under way in the metro area. "New construction has not yet come to the levels that meet demand," he notes. Buildings currently under construction "get leased before they are completed," he says; but, given a continued strong economy and the relatively short lead times required for industrial construction, he looks for this situation to be corrected, "perhaps within a year."
Work has been completed on the fifth phase of Gwinnett Corporate Center, a 115-acre high-end business distribution center in the Gwinnett County/1-85 North market, according to Dexter Company senior vice president Allen Anderson. "We opened at about 51% pre-leased," he notes, adding that a sixth phase will be completed in the next several months. Dexter Co. is also starting a 178,000 sq. ft. first phase of Kennesaw 75, a speculative office/warehouse development. A late-1995 opening is slated for the project, which is located in a the vicinity of the Town Center at Cobb regional shopping mall, the anchor of a northwest-Atlanta suburb that Anderson feels "will really break loose" in the coming months.
Investor interest in Atlanta industrial product has been strong of late, adds King. "I'll bet that 10% to 20% of all speculative buildings in the metro area have changed hands in the past 18 months," he says, with REITs accounting for the lion's share of activity.
Denver-based Security Capital Industrial Trust has built an Atlanta bulk warehouse/light industrial portfolio of some 4 million sq. ft., according to southeastern regional director John Seiple. This REIT is also purchasing land for development, he says, and is in the process of breaking ground on projects in Airport Industrial Park and Gwinnett County's Tradeport Distribution Center.
In Southpark, a 1,200-acre industrial park owned by M.D. Hodges Enterprises, Inc., and located south of the airport on 1-85, the company is building a 390,000 sq. ft. speculative warehouse/distribution facility. This project marks the start of the second phase of construction. The first phase, consisting of 1.4 million sq. ft. of industrial space, has been fully leased since its completion in 1992. Retail notes
Already considered by many as "the retail center of the Southeast," by virtue of Lenox Square and Phipps Plaza, the Buckhead/Lenox area is experiencing a wave of new retail construction. Regent Partners, the German company that owns the Tower Place mixed-use development, "is creating an entertainment/restaurant center to complement our existing amenity base," according to company vice president David Dick. A May grand opening is slated for this complex, which features a variety of restaurants and musical entertainment establishments.
Across Peachtree Road from Phipps Plaza, a Summer 1995 opening is slated for Buckhead Triangle, a 100,000 sq. ft., split level specialty retail center, according to Shirley Gouffon, vice president of Atlanta-based Selig Enterprises. Anchor tenants for the new center include Circuit City and Border's Books and Music.
Meanwhile, Atlanta-based Jacoby Development has recently purchased 26 acres of land in the Buckhead area, and is planning redevelopment of the site as a power center anchored by discount retailers.
Elsewhere on the metro Atlanta retail front:
* Jacoby Development is also building a 365,000 sq. ft. Wal-Mart- and Border's Books-anchored power center called Perimeter Village in the North Central area,
*-based Homart broke ground in early March 1995 on a mid-Perimeter power center, the 367,800 sq. ft. Perimeter Pointe, which is slated to be anchored by a 2,400-seat United Artists Theater, Steinmart, Pet-Smart, and several other big-box retailers,
* North Point, Atlanta's newest regional mall, will be adding a Dillard's to its multianchor array in 1996, the first foray by this department store chain into the metro market.
According to a report from Richard Bowers & Co., 9.1% of metro Atlanta's 85.6 million sq. ft. of multitenant retail space was vacant at the end of 1994, capping a year in which the market absorbed some 3.3 million sq. ft. of space. Around 3.1 million sq. ft. of new space was under construction at the beginning of 1995, the report notes; of this total, approximately 75%, or 2.3 million sq. ft., was preleased prior to completion.
Apartment market perspectives
1994 was a turnaround year for Atlanta's apartment market, and the outlook for 1995 and beyond is positive, according to CB Commercial first vice president Malcolm McComb. "The market bottomed in 1992, when rents were sliding and occupancy was in the high-range 80% -- not very good at all," he notes. The picture has changed dramatically since then. "1993 was the year when owners were able to get rid of concessions and get their occupancies up," says McComb, "and in 1994, rental rates started moving up, in some submarkets by as much as 15%."
The average monthly effective rent (gross potential adjusted for vacancy and concessions) in the Atlanta apartment market was $576 at the beginning of 1995, according to Evan Jennings, president of The Apartment Group Inc., an Atlanta-based apartment brokerage firm. Metro apartment occupancy stands at 93%, he notes, while some 14,640 units are in various stages of planning or construction.
"There is a lot of construction going on," says CB Commercial's McComb. "The apartment market fundamentals in the Atlanta apartment market are superb," he says. "The only thing that could possibly change that is overbuilding."
There's room for more apartment units in Atlanta, says Jordan Clark, senior vice president of Gables Residential Trust, an Atlanta-based REIT. Compared with other Southeast markets, "Atlanta is second only to Nashville in terms of capacity to absorb new units," says Clark. Gables has shifted its Atlanta focus from acquisition to development "because we are able to develop new properties at yields up to 300 basis points higher than cap rates for comparable properties." The REIT has 950 units under construction in four projects located in north Atlanta. Construction is also under way on The Estates at Phipps, a 234-unit upscale apartment complex with monthly rents in the $1 per sq. ft. range, on a site behind Phipps Plaza in Atlanta's Buckhead/Lenox submarket. The developer of the project is Columbia, S.C.-based Estates Inc., a developer of apartment and office properties in the Carolinas and Georgia Completion Of the first building is slated for late spring of 1995, with total project completion this fall.
In the investment arena, prices paid for newer, 50-plus unit garden apartment complexes ranged from $25,581 to $63,613 per unit during 1994, according to CB Commercial. "Prices jumped early in the year and held in spite of rising interest rates," says McComb; in 1995, he expects "values to again resume their climb, as increases in operating cash flows outweigh higher debt costs."
Atlanta's own Phipps Plaza, owned by Equitable Real Estate Investment Management, Inc. and managed by Compass Retail, Inc., was recently recognized at the International Property Market in Cannes, France, for winning the Urban Land Institute's Award for Excellence for best "Large Scale Development" in North America.
Phipps won ULI's award, which is considered the most prestigious in the real estate industry, last October. The upscale shopping center now has won at least 24 national and international awards.
The international market, also known as the MIPIM or Marche International des Proffessionnels de L'Immobilier, is the world's largest real estate convention. ULI Excellence winners were presented to more than 5,500 convention attendees from 48 countries, representing every segment of the real estate industry.
ULI has honored development projects across the United States and Canada for the past 15 years.
Phipps Plaza has more than 822,000 sq. ft. on three levels, with more than 90 specialty retail tenants. The upscale shopping center is anchored by Lord & Taylor, Parisian and Atlanta's only Saks Fifth Avenue. A recent expansion and renovation by Compass Retail doubled the mall's size and brought over 75 new tenants to the center.
"Occupancy in Phipps Plaza reached as high as 93% to 94%," says Phillip Stephens, president and CEO of Compass Retail. "Now some of those leases are starting to turn over and we're fine-tuning the merchandising mix. We have an extremely vibrant market here, there's lots of growth."
Martin Sinderman is an Atlanta-based regular contributor to NATIONAL REAL ESTATE INVESTOR and SOUTHEAST REAL ESTATE.