During the past two years, bashing Atlanta's real estate market has been in vogue among Wall Street analysts and national prognosticators. In a much touted report issued in October 1999, former PaineWebber REIT analyst Jonathan Litt warned investors to avoid Atlanta because of fears the market was on the brink of becoming overbuilt.

However, a funny thing happened on the way to Atlanta's demise. The Southeast's largest city and commercial hub became a mecca for technology and telecom companies. Whether homegrown entities such as Internet service provider MindSpring Enterprises (which merged with Earthlink in February) or national powerhouses such as Sprint Corp., MCI WorldCom and Yahoo!, high-tech and telecom companies supplied an unexpected jolt to Atlanta's commercial real estate market.

Internet-related companies created jobs at such an astounding rate that even renowned Georgia State University economist Donald Ratajczak was caught off guard. He underestimated the number of new jobs that Atlanta would create by tens of thousands. The metro area created about 113,000 new jobs last year, he said during a speech at the ULI Atlanta District Council's Trends Conference. When the final number is tabulated, he told the group, it could be as high as 130,000, a figure he characterized as "truly remarkable."

The number of new Atlanta jobs should drop to about 85,000 this year. But, "that's not a bad number," Ratajczak told the group.

As technology and telecom companies hire more employees, they require more room. High-tech and telecom companies that needed space in chunks of 10,000 sq. ft. or more, leased more than 4 million sq. ft. in 1999 to almost single-handedly keep Atlanta's office market humming. With 4.9 million sq. ft. of net office absorption, 1999 would merely have been a mediocre year without the presence of such companies, says Tom Tindall, a principal at the Atlanta office of CRESA Partners, an alliance of real estate service providers.

All of Atlanta's office submarkets are benefiting from the technology boom, says John Shlesinger, executive managing director in the Atlanta office of New York-based Insignia/ESG. He and partner Sam Holmes represent many of the major high-tech tenants seeking space.

"Without the need for additional office space from high-tech and telecom firms, Atlanta probably would have experienced a slowdown in demand in 2000," says Shlesinger.

Holmes unequivocally agrees with his partner. "No word exists which could adequately express how important the high-tech boom is to Atlanta real estate," he says. "Atlanta will always be the regional darling of corporate America, which helps all of us brokers and developers pay the bills, but that doesn't come close to comparing to the lifeblood of Atlanta's economy: high-tech/telecom. The renaissance in Downtown and Midtown and the amazing growth in North Fulton would be only a dream without it. Thank goodness for the amazing entrepreneurs we have in this town."

The high-tech and telecom companies' insatiable appetite for space has not been limited to the office arena. E-tailers such as Seattle-based Amazon.com, Kirkland, Wash.-based HomeGrocer.com and Foster City, Calif.-based Webvan leased large distribution centers in the suburbs.

The tech companies, which have a penchant for office spots in Midtown and Downtown, helped propel the intown residential boom. Young, hip high-tech people want to live close to work and the burgeoning activity, especially in Midtown.

During the first quarter, the technology and telecom revolution in Atlanta continued to pick up steam, a portent of another strong year for Atlanta's commercial real estate.

A healthy equilibrium This year began with an increase in the amount of technology and telecom companies leasing space. S1 Corp., a company that makes software for Internet banking and financial services, signed a 185,000 sq. ft. lease that will help Toronto-based TrizecHahn Office Properties kick off One Alliance Center, a 20-story, 500,000 sq. ft. office tower on the Buckhead Loop.

When TrizecHahn begins construction this month, One Alliance will be the only office tower under construction in Buckhead, where only 7.5% of the Class-A office space is vacant, according to Bethesda, Md.-based CoStar Group Inc. Other developers such as Chicago-based Equity Office Properties Trust are considering office towers in Buckhead, but they likely will wait to see how TrizecHahn's building fares before proceeding.

In the suburb of Gwinnett County, KMC Telecom leased the entire 103,650 sq. ft. Hillside One speculative building that Bedminster, N.J.-based M.D. Hodges Enterprises and Indianapolis-based Duke-Weeks Realty Corp. are developing at M.D. Hodges' Huntcrest, a 416-acre mixed-use community. Moreover, the telecom provider has leased a floor in Hillside Two, construction of which will begin this month.

The strong activity at Huntcrest is indicative of the overall health of Atlanta's office market, says Bob Chapman, regional executive vice president at Duke-Weeks. He oversees the REIT's Atlanta and Dallas regions. "2000 absorption should be more than 5 million sq. ft. That's at or above 1999 levels," he says. "The hot corridors are Interstate 85 and [Georgia Highway] 400." Along I-85 in Gwinnett County, Duke-Weeks is developing Hampton Green, a five-story, 121,837 sq. ft. office building that will house its regional headquarters for the South.

Atlanta's overall office market should hold its own this year, says Richard K. Pitts, director of advisory services in the Atlanta office of the CoStar Group. "Although it may sound cliche, Atlanta's office market remains in a relative state of healthy equilibrium," he says. "Build-to-suit activity continues to be strong as well, with more than 2 million sq. ft. of new, single-tenant, owner-occupiedoffice space completed during 1999. Barring a prolonged recessional economic environment, the overall spec vacancy rate will most likely rise only marginally by the end of 2002." Atlanta ended 1999 with an overall office vacancy rate of 11.4%, according to CoStar.

Pitts says the Downtown, Midtown and Buckhead submarkets will continue to see very strong demand for office space this year, especially from tenants looking to expand. "High-end, Class-A office space is scarce within these areas and average quoted rates for trophy space are still rising in the three-core, intown submarkets," he says. "The first new tower construction in Downtown and Midtown since the early-1990s is occurring. Additionally, the emerging suburban markets of North Fulton and Northeast Atlanta will continue to see growth as long as the local economic environment remains favorable."

Pitts alludes to the Proscenium and Atlantic Center Plaza, two similarly-sized office towers under construction within two blocks of each other in Midtown. Both buildings were started with substantial preleasing.

Dallas-based Trammell Crow Co. started the Proscenium, a 23-story, 527,000 sq. ft. tower, with 35% of the space preleased to four companies. It expects to deliver the building at 14th and Peachtree streets in March 2001.

Atlanta-based Pope & Land Enterprises began construction in March on Atlantic Center Plaza, a 23-story, 500,000 sq. ft. building at 14th and West Peachtree streets. Pope & Land started the building after landing a 40% prelease from Alston & Bird, one of Atlanta's largest law firms. The building should be completed in October 2001.

In late April, Houston-based Hines broke ground on One Overton Park, a 350,000 sq. ft. speculative building in Cobb County. The facility will be part of a mixed-use development that will feature two apartment towers and 1.5 million sq. ft. of office space .

Todd Yates, vice president of The Alter Group in Chicago and general manager of the company's Southeast region, says North Fulton will continue to lead metro Atlanta's office market. North Fulton ranked No. 1 in 1999 in net absorption with 1.56 million sq. ft. and in the amount of spec space under construction with 1.95 million sq. ft., according to CoStar.

"The North Fulton County market will continue to dominate the metro area because it addresses the fundamental need to put office space closer to the major residential bases," says Yates. "The buildings in the area have done an admirable job of crystallizing the new philosophy of office space. They provide functional and efficient space which can accommodate higher densities of employees and supply the necessary amenities packages."

The demand for hip, high-tech office space with exposed ceiling and beams has gotten out of hand in Atlanta. In a deal talked about throughout the brokerage community, an Internet start-up will pay $26 per sq. ft., plus more than $3 per sq. ft. in expenses, for a 12,000 sq. ft. converted warehouse in the Virginia-Highland neighborhood. The company, Sparkfly.com, beat out four other dot.coms for the space that is being vacated by eTour.com, also a high-tech company.

Such deals have left brokers shaking their heads and developers scrambling to convert any old, intown warehouse into space comparable to that found in South of Market in San Francisco. Atlanta-based Midtown West Associates has hired Carter & Associates, also in Atlanta, to market BrickWorks.com, an old warehouse district west of Downtown on Marietta Street. All told, the development could include 800,000 sq. ft. of bricks-and-beam space. As opportunities dry up, developers are looking to the Chattahoochee Industrial District. Westwood Properties of Atlanta has hired Barry Real Estate Services, also of Atlanta, to market DeFoors Tech Tank, a 90,000 sq. ft. development in the Chattahoochee area.

Distributing impact Technology companies also had an impact on metro Atlanta's industrial market, especially on distribution centers. While some economists predicted e-commerce would lessen the need for warehouse space, it has created demand for large distribution centers.

In 1999's largest industrial lease, Amazon.com grabbed an 800,000 sq. ft. distribution center that Chicago-based First Industrial Realty Trust developed on a speculative basis in McDonough, a suburb situated about 30 miles south of Atlanta in Henry County. The facility will serve as Amazon's Southeast distribution center. It initially employed about 500 people; the number is expected to double.

Another e-commerce company, online grocer Webvan Group, leased an entire 350,000 sq. ft. distribution center in Suwanee, a northeastern suburb in Gwinnett County. The company leased the space from San Francisco-based AMB Property Corp., which made the deal with Webvan right after buying the building from Industrial Developments International (IDI) of Atlanta. Webvan also plans to set up seven 14,000 sq. ft. satellite delivery stations that will enable it to access most of Atlanta's affluent northern arc.

With leases such as those signed by Amazon and Webvan, Atlanta recorded a net absorption of nearly 14 million sq. ft. of warehouse, distribution and business-service space last year, according to CoStar. The metro area's overall industrial vacancy rate crept up to 8% in 1999; the rate at the end of 1998 was 7.9%

The slight increase came as developers completed 15.5 million sq. ft. of industrial space in 1999. The slightly upward trend continues a pattern that started in the mid-1990s. For 1994 and 1995, Atlanta's overall industrial vacancy rate was 5%, compared to 6% in 1996 and 1997.

CoStar projects that Atlanta will absorb an average of 9.3 million sq. ft. of industrial space annually over the next three years. That will keep pace with developers, who are expected to deliver an average of 10.3 million sq. ft. of space annually during the same period. By the end of 2002, Atlanta's industrial market will contain 380 million sq. ft., according to CoStar.

Pitts says developers will have to stretch the current submarkets to accommodate future industrial growth in Atlanta. "As affordable land becomes scarce in Northeast and Northwest Atlanta, new industrial development has shifted farther north to the outlying areas in the I-85 and I-75 corridors north of the city," he says.

Duke-Weeks, the dominant industrial developer in Atlanta's Northeast area, is extending that submarket by building the 5 million sq. ft. Braselton Business Park in the town of Braselton. The REIT has just started the development's first building, a 503,000 sq. ft. bulk-distribution facility.

On the telecommunications side, the need for data centers is also boosting the industrial market. "The rapid expansion of telecommunication and computer-related industries, and the escalating demand for data center space is sending brokers in search of industrial buildings that have access to fiber-optic lines, dual power and high-reliability electrical service," according to Northbrook, Ill.-based Grubb & Ellis' 2000 Real Estate Forecast - Atlanta. "Low unemployment will drive industrial operations to minimize labor and maximize automation."

The overall health of Atlanta's industrial market is very good, says John Decker, a partner at Atlanta-based Childress Klein Properties and 2000 President of the Georgia Chapter of the National Association of Industrial and Office Properties (NAIOP).

"The endurance of our strong industrial market continues to amaze me. Some submarkets are experiencing some cycles and fluctuations in tenant demand, but generally job growth, and therefore absorption, seems very strong," he says. "Atlanta should be fine through 2000. My crystal ball gets blurred after that. If the national economy remains at its current strong level, Atlanta should continue to do nicely."

It's not all sunshine Atlanta's retail market always receives a lot of attention because of its large number of shops. Last year, two malls larger than 1 million sq. ft. opened in metro Atlanta. The Mall of Georgia, which opened in August, garnered excessive media attention as the biggest mall in Georgia and the Deep South. (Sawgrass Mills in Broward County, Fla., is the largest mall in the Southeast.) The Mall of Georgia is one of several malls Indianapolis-based Simon Property Group owns in Atlanta. Its size has forced the Canadian owners of the Greenbriar Mall on Atlanta's Southside to begin to market the property because it cannot compete. The other regional mall to open was Arbor Place Mall in Douglasville.

However, not all the news is good. J.C. Penney company announced in February that it will close 21 Eckerd drugstores in the metro area and one full-sized store on the Southside.

"Overall, the retail market in Atlanta is still healthy with pockets of strengths and pockets of weaknesses," says Kris Cooper, senior director of New York-based Cushman & Wakefield.

"Despite the 'grocery wars,' retail product in the right location still demands top pricing," adds Cooper. "On the flip side, weaknesses are evident in centers that are not grocery-anchored."

Atlanta's retail market is approaching an overbuilt status, adds Cooper. "While there is still a need for quality retail in terms of new construction or rehabs of existing centers, those constructed without sufficient anchor credit tenants are in serious jeopardy of not doing well," he says. "However, the overall market is still healthy in terms of its high occupancy levels. There is still an underlying current of uncertainty in the market because of the fact that many of the big boxes have experienced difficulties.

More and more apartments As metro Atlanta continues to attract new people and new jobs, multifamily developers continue to develop new apartments and condominiums. The Buckhead, Midtown and Downtown submarkets are seeing a lion's share of the upscale development.

Atlanta's own Post Properties is leading the charge back intown. Its recently-opened Post Parkside community next to Piedmont Park in Midtown is commanding the highest rents in the metro area at $1.57 per sq. ft. Post is betting that it can achieve rents of $1.75 per sq. ft. to $2 per sq. ft. at 2626 Peachtree, an apartment high-rise it has proposed in Buckhead. The multifamily REIT expects similar rents when it opens a new community adjacent to the historic Biltmore building in Midtown, says Jeff Harris, a long-time Post employee who took over as president in March.

Atlanta's apartment market is robust, says Harris. "Based on the lease-up and rent levels we're seeing, the Atlanta apartment market is doing very well," he says.

Average rents in metro Atlanta will increase about 3.25% this year, according to Palo Alto, Calif.-based Marcus & Millichap's March Atlanta Apartment Market Report. "Rents have risen above the rate of inflation and currently average $732 per month," the report states. "From third-quarter 1998 through third-quarter 1999, rents increased an unexpected 6.4%, due primarily to the high volume of Class-A completions." The highest rent districts are Buckhead, the Central Business District (CBD) and the Emory University area, according to Marcus & Millichap.

Atlanta's condo market is also in good shape. Several towers are under construction, most of them in Buckhead. Park Signature Properties of California plans to build Park Vinings in Cobb County.

In the CBD, a partnership of Southeast Capital Partners, Selig Enterprises and the Harold A. Dawson Co., all of Atlanta, is expected to begin construction this month on a 19-story tower that will feature 130 condominiums adjacent to Centennial Olympic Park. The group, Centennial Hill Development Partners, plans to add an office building to the mix later this year. Fewer than two blocks away, developer Jim Borders and the Atlanta Neighborhood Development Partnership will build Centennial House, a six-story, 101-unit condo that will have prices beginning at around $120,000.

The Alter Group's Yates sees another healthy year ahead for Atlanta, especially in the office arena. "The office upcycle is a corollary of the exuberant U.S. economy, and as long as the country continues to prosper, it will propel the need for office space," he says. "Considering the depth of the tenant base in Atlanta, coupled with the city's prospects for job growth, it should remain one of the strongest office markets in the nation."

He is probably right, as long as the NASDAQ does not crash.