In development circles, the Atlanta region is known as the land of milk and honey because of abundant opportunities in all property types. The capital of the Southeast has been tagged by the Atlanta Journal-Constitution as a new economy magnet because of the growth of high-tech jobs here. Among top cities drawing domestic migration between 1990 and 1998, Atlanta ranked No. 1 with 440,668 people, reported the AJC.
But not all theis glowing. The region has been stung by criticisms of its urban sprawl. The exponential growth in population and corresponding growth in the number of automobiles during the 1990s has led to today's air-quality problems and placed a heavy burden on the existing infrastructure.
Meanwhile, job growth continues here at a moderate, if not feverish pace. Indeed, these are heady days for the city that once claimed to be too busy to hate and now is too busy to get sidetracked by a few growth problems. New office buildings, new shopping centers and cranes dotting the skyline serve as constant reminders of the region's growth.
To put these issues into context, NREI assembled a panel of prominent local commercial real estate professionals for a roundtable breakfast at the Ritz-Carlton in Buckhead. Edited highlights of that panel discussion, moderated by Editor Matt Valley, follow.
NREI: Nancy, from 1967 to 1973, you worked for the city of Los Angeles in the department of long-range planning. Since 1980, you have worked in a variety of planning and economic development capacities for Fulton County. How well is Fulton County managing growth? How does it compare with other major metropolitan areas nationally in managing growth?
Nancy Leathers: During the 1960s and 1970s, there was a huge amount of in-migration into Los Angeles nationally, not so much internationally. Atlanta has gone through some of the same kinds of issues that Los Angeles has, including trying to focus its development and begin to better use its infrastructure.
We do have a lot of growth on the north side of Atlanta. We don't have as much growth on the south side. In Fulton County, a county which cuts across the metro area unlike any of the others, we see both the explosive growth on the north side and the lack of growth on the south side. From a policy point of view, that's a problem.
We do need to get more even growth in metro Atlanta because it will assist us in assuring that we can provide the kind of tax base in a governmental jurisdiction that will support the growth throughout. We are going to struggle with explosive growth because of those kinds of issues.
The explosive growth on the north side has been difficult for us to manage. In this morning's paper, there was a discussion about the sewer spills at Big Creek. It is an issue that we have to manage. But unlike the old days, it cannot be done quickly. It cannot because the ground rules have changed significantly.
It used to be that you could do an upgraded sewage treatment plant in maybe three to five years. We are not looking at anything in that range now given the state and federal requirements. We will be looking to the business community to work with us in finding solutions to these problems.
NREI: I understand that obtaining entitlements [approvals] for development is increasingly becoming a problem.
Phil Stevenson: We have been living in the "happy valley' in Atlanta for a long time. Those of us who develop around the country recognize that [obtaining zoning and environmental approvals] has been nothing like it has in Florida andand some other jurisdictions. It's here now. We jump-started it with the clean-air problems that have resulted in the creation of GRETA (Georgia Regional Transportation Authority).
Success in our business is a function of a lot of different things: location, a good development team, rental rate - the whole spectrum. In that spectrum are entitlements. If you have a piece of land that is zoned and ready to go with sewer and water, it is so much more important now than it was 20 years ago. It was never easy, but it takes so long to get it done and do it right.
You marry that up against what tenants are wanting. I read a Chamber piece that said that 45% of the corporate expansions or relocations to Atlanta last year were high-tech firms. The ones we work with, the dot.comers, want to move in right away, not 18 months from now.
You have a little bit of a push and pull here from the developer's perspective. It simply is going to take longer - probably appropriately so. There are different constituencies you need to please. From the tenants' perspective, they don't care about all of that. They just want to be in business, and they want to be in business now. That's the dilemma that we are going to be facing in the months and years ahead - the increasing importance of entitlements on the one end and the desire to have it now on the other end.
NREI: If they don't get it now, will they go elsewhere, and are they going elsewhere?
Stevenson: Where they're going, which from a public policy standpoint is probably pretty good, is to infill. The dot.comers want to come in and have that high-ceiling, Seinfeld-kind of working environment. It's fueled by what's available. You look at the situation comedies 20 years ago - "Leave it to Beaver,' "Brady Bunch' - they're all set in the suburbs, right? You look at the sitcoms today - "Seinfeld,' "Friends' - they're all in a kind of [urban] loft space. It's a shift, and we as an industry are responding.
NREI: Can North Fulton County support more office development?
John Murphy: I think it has to. That's where the absorption is. That's where a lot of the jobs are being created. Can it support it? Yes. In 1999, 37% of the office absorption was in North Fulton County. In the Alpharetta area in particular, it didn't exist seven, eight, nine years ago. You had a few owner-occupied buildings out there of large size but as far as the spec market, it didn't exist.
We have done four buildings [in North Fulton County] over a four-and-a-half year period. The first building leased up overnight. The second leased up very quickly. The third building leased up quickly, but a little bit slower. The fourth building has leased up fairly well, but slower yet. From the first building to the fourth building, we've seen a slower lease-up with each subsequent building. My concern is that if you have the entitlements and you can do a building, other folks are doing buildings also, and that's where everybody wants to go. There's a bit more competition out there. There's more pressure on rental rates and concessions. That's my concern for the Alpharetta/North Fulton County area.
NREI: What are tenants demanding in a Class-A office building today?
John Murphy: Cheap rent. There hasn't been a whole lot of change in the basic efficient building footprint. There has been a lot of pressure on parking, which means more people on the floor, which means more HVAC and more electricity because of equipment. The 25,000 or 30,000 sq. ft. floor plates are still the floor plates of preference. It's a rent-driven market right now. It's still very tight and you have to know what your numbers are.
Patrick Duffy: Six years ago, it seemed that everybody wanted health clubs in the buildings. With most of the tenants we are working with today, I don't see that as a big issue. The amenities today are really more infrastructure-related - the ability to have larger parking ratios, more watts per square foot, better HVAC.
We are working with a technology company right now that is about to lease 75,000 sq. ft. When we started looking at amenities and building issues, it really came down to who's got the better air conditioning, who's going to be able to provide better comforts to the tenants. I think there are more comfort issues vs. luxurious amenities than we saw in the past.
NREI: To what degree are the dot.coms driving some of the demand for space in this market? How big of a component are they in the Atlanta market?
Thomas Senkbeil: I think they are a fairly significant portion of the office program. If you take the dot.coms combined with the telecommunications and the real technology growth, it's pretty significant. The real challenge from our standpoint is the credit issue. We are not equipped to trade our rent for warrants. Although in some cases we have actually taken warrants, we're there to receive our rent. We have to make sure that we have adequate collateral because it's very difficult to predict these companies. They grow rapidly. They have huge sources of capital today.
If you were to identify the top 250 technology companies, exclusive of the Microsofts and the Ciscos, and analyzed the ones who've truly just started up, they have three to six months of capital, according to an article in Barron's. They're burning [capital] that fast, and that's a real challenge.
NREI: Hugh, you indicated to me that the spread seems to be widening between what sellers are asking vs. what buyers are willing to pay. What precipitated this disconnect?
Hugh McWhinnie: I think it's more on the office side. I think there's plenty of capital there. In the last few years our clients have done a lot of office. They were able to buy buildings where you could see a rising market. The rents were below market. There was a lot of upside potential. Today the markets are pretty much in equilibrium, the rents are up, and the investors ask, 'Why do I want to do this?"
For us, it's becoming more and more of a challenge to find what we call a "core" office building to match up with a client. It may be driven partially by the returns on Wall Street, where investors want to see a 20% return. We can find all the money we want for opportunistic deals. The problem is finding opportunistic deals. I do have some concerns on the office side. I've seen a number of deals come onto the market that haven't sold. I wouldn't be surprised if we see a little bit more of that this year.
Bernard Haddigan: Interest rates have gone up significantly in the past year, so I think properties are not underwriting the way they did in the past. Second, a lot of investors have decreased confidence that rents are going to keep moving. The rent growth of the last five years is highly unlikely to be seen over the next five years. As a result, investors are underwriting these deals, saying, "I'll pay up to X.' And sellers' mentality by and large is where it was 12 months ago. We're seeing decreasing velocity.
NREI: Greg, give us your current assessment of the industrial market in Atlanta. What strengths, weaknesses and trends do you observe?
Greg Gregory: I think the Atlanta industrial market is fairly unique, and it's always been very competitive. It's got the lowest margins of any major market in the United States. We develop a lot in southern Florida and Southern California. Entitlements are very tough in both those markets. It really challenges a developer, but our margins are great in those markets.
If you've got an environment where your entitlements are not arbitrarily applied and they're well thought-out, they can be a boon for a good long-term developer. The guy who's in and out of the market, he's not going to do so well. The guy who's there for the long term, he can make money and maybe better plan growth. That kind of growth can give the developer high margins.
Here in Atlanta, competition is tough. Capital is always attracted to this market. Every now and then our margins are temporarily good and then they get squeezed again. It's a core market, a market we have to be in. It's a market that I think is changing. We're finally seeing change with entitlements, and that will be tough on us as we learn how to adapt. But I think in the long run, it's probably good.
NREI: In 1989, when IDI was launched, you recorded revenues of $3.2 million. Now you're at $285 million. Had you started yourcompany a decade later, could you have achieved that same kind of growth over 10 years?
Gregory: No. We were absolutely just blind lucky. I ended up with money at the right time, and the right time was 1989 when the real estate market was going in the toilet. I was confident that we could buy market share, grow and we did. We were very lucky to come out in a very bad real estate market and grow. Now, the challenge is trying to survive the recovery. That's what we'll continue to try to do - reinvent ourselves and try to remain entrepreneurial.
Senkbeil: Atlanta is a very competitive market. On the other hand, it has always had one of the highest, if not the highest, absorption rates. You also have some of the lowest cap rates when you go to sell properties. Even though maybe your yields aren't as good, we probably have some of our most profitable projects here. You just have to understand that this is clearly a market where you have to understand the competition.
For example, we probably are doing a little less industrially today than we were four years ago. The reason is we are picking and choosing. We try not to make real estate a hobby. Some people make it a hobby because they do it for nothing. At those times, we're just going to step back and let people slug it out a little bit.
Our Florida markets are good. The timing it takes to do a project in Florida probably eliminates a lot of competition. You have to be dedicated to the market for the long term to survive there. Chicago is quite a lot like Atlanta. It's a big market, big absorption, lots of competition, low margins. But again, very low cap rates when you go to sell. Our Midwestern markets are good, solid markets. They are much better markets than anybody gives them credit for. We might have three or four competitors in those markets instead of 30 or 40.
The balance is good today between supply and demand. It's been sustained for longer than that I have ever seen in my career. I would have thought by now we'd have hit a tremendous imbalance, but every time that starts to happen something has pulled it back.
NREI: Mike, you have more than 20 years of experience in the downtown Atlanta market. Please put the market in historical perspective for us.
Michael Elting: We are going to have to do things a lot differently in Atlanta because of some of the issues we are talking about: air, water, traffic. The potential that we have ... I had occasion to visit Spellman [College] for a meeting yesterday. You should see the improvements in downtown Atlanta and all the things going on at Spellman and Morehouse [colleges] at the Atlanta University complex. The surrounding area used to be a place where you didn't even want to drive or go.
I think North Fulton is fine. Don't get me wrong, ouraren't going to focus on downtown because you can't make a living there now. But the future of this city in the next 20 years is going to change dramatically.
It's a whole new employment generation. The housing is changing a lot. Post Properties is doing a few thousand units in the urban core of the city. I try to get our people to go look south and see what's going on. For developers, there's going to be some opportunities. I think eventually we are going to be surprised at how much potential there is down there.
Senkbeil: The north side has had the most spectacular growth of virtually anywhere in the country. The south side has achieved pretty strong growth if you compare it to most any other metro area. I think that's what is lost in the shuffle. What's exciting about Atlanta for the future is we do have the potential for balanced growth for the first time ever.
We are market-driven. I get angry when I read articles about how all the developers are encouraging urban sprawl. The last time I looked, it has been going on since 1946. Basically, we are reacting to where demand is. The demand follows housing to a large degree. This is the first time we have ever had in-town housing growth in Atlanta. That means the demand is going to follow it because everybody would just as soon be relatively near their office. On the south side, if you look at Peachtree City, if you look at Henry County's growth, it's pretty strong growth. Offices and other businesses are going to follow.
NREI: Nancy, is there anything you'd like to add?
Leathers: We are seeing infill development, and I think we will continue to see that. At some point, infrastructure becomes a significant issue and I think we're getting to that point now. We have got the ability in town and the south side to be able to provide that kind of We have also got the ability to not necessarily make all of the mistakes that we might have made on the north side, if folks would take a look at the nature of development.
Hopefully, we have learned some things from the way we have developed and we can improve on what we have done. We have a series of new developments in South Fulton County that really start to take advantage of some of the new concepts in development and that begin to take advantage of our existing infrastructure.
NREI: Mike, you once held the directorship on the Midtown Business Association. What kind of insights did you learn that you have been able to bring to your job?
Elting: So many of those groups, whether it's CAP (Central Atlanta Progress), The Downtown Partnership, Midtown Alliance, all of those consisted of people who had vision. Those people who were there before it was in vogue are the ones who really kept things going in Midtown and Downtown. John Portman's vision for Downtown kept it alive.
John Murphy: I think back to the Midtown Alliance, or the Midtown Business Association as it was formerly named. A lot of the meetings were focused on crime and bringing more police into Midtown. I think they should be commended for their foresight. Their first issue was cleaning up the streets, cleaning up the graffiti and lowering the crime rate. Then they brought in this master planner to start looking at what Midtown should look like. That was a two-year process, but the Blueprint [Midtown] was a great idea.
Stevenson: Midtown is the planner's dream come true. It's the mixed-use sort of thing we talked about. Our office is opposite the Arts Center. It's easy to get in and out. You can go walk in Ansley Park for lunch. You can walk to four or five restaurants. There's culture across the street. There's a rail station a block away to take you to the airport. You don't have to worry about parking. It's a great place.
Blueprint Midtown is a document that works. So often you have these planning exercises and people get interested and it's shelved. The stakeholders in Midtown believe in this Blueprint.
NREI: Switching gears, what impact will the Phase IV expansion to the Georgia World Congress Center have on Atlanta's hotel market, and will this lead to the construction of additional hotels downtown?
Mark Woodworth: I think the impact is likely to be substantial. I think it will result in more supply being added to the Downtown sector. What we have seen over the last 15 to 20 years, every time there has been a meaningful expansion to the infrastructure in Downtown, the market has responded very quickly in a big way in absorbing that capacity. We feel really good about the future of the Downtown hotel market.
NREI: Atlanta has been one of the leading lodging markets in the nation over the past five years in terms of hotel supply growth. Why has that occurred, and will it continue?
Woodworth: I think it has largely occurred because people somehow found the money to do it. I think that some of the underlying factors are the business model, or the ownership model, in the lodging industry has changed pretty dramatically over the last five to eight years, particularly here in Atlanta. We have a much larger percentage of owner-operators today than we did back in the 1970s and 1980s. Simply stated, if you strip out the 3% management fee that typically is built into the cost model for a hotel, you realize that your break-even point drops pretty significantly. What we are seeing now is that people are penciling out these deals in places like North Fulton County at stabilization levels that are well below the traditional norms.
NREI: How will the addition of a fifth runway at Hartsfield [Atlanta International Airport] impact the airport hotel market?
Woodworth: I think in a very positive way. Not only does it represent this notion of expansion to capacity, but as a consequence of where the fifth runway is going, there is going to be a short-term diminution of supply. The loss of hotels along Sullivan Road is going to shrink the supply of what, over a long period of time, has really been the strongest hotel market in Atlanta, at least in terms of consistency. A lot of people don't really focus on that because the offset is the prices tend to be on the lower side. In terms of the year-to-year performance levels, the airport's [hotels] are among the leading sectors in Atlanta.
NREI: Joel, previously you've talked about about how you believe Cousins' project, The Avenue East Cobb, represents a shift in consumer behavior in upscale areas. How is The Avenue concept serving as a microcosm of the bigger retail picture?
Joel Murphy: In retail, an often meddlesome, very fickle third party called the consumer is introduced into the landlord-tenant relationship. The consumer is a lot more important than the landlord, and a lot more important than the tenant. I think that with The Avenue, we are working on our assessment of a city within the suburb. On a micro basis, The Avenue targets an affluent submarket, where people feel as though their retail shopping needs have not been met.
How do you assess that? Retailers have to check where they think they're getting their sales and if there is market. You could be within the geographic influence of a mall, but not the psychological influence of that mall.
East Cobb was only geographically five to seven miles from some malls. If you look around, there are 2.5 million sq. ft. of malls in every direction. You might say, 'Why does there need to be anything there?' We put 220,000 sq. ft. in there, and it's driving huge sales per square foot. On average, the tenants at The Avenue East Cobb are registering $450 per sq. ft. in sales. We have numerous tenants that are over $500 per sq. ft. It's really not even affecting the mall sales of any significance of those same stores that are in those malls five to seven miles away. The reason is the shoppers who frequent The Avenue do not feel that the mall format is somewhere they want to go. There is a little bit more to the experience.
The consumer today is very sophisticated. Retailers have to do the best job to make sure these customers are rewarded for being there when they are in the retailers' mousetrap. Customers are extremely fickle, and one bad buying season for Banana Republic or any retailer, and the consumer reacts.
NREI: What effect will higher interest rates have on the commercial industry in the short term?
McWhinnie: I think most big investors have already factored in these interest rates. They know they are on the rise. I don't really see it having that big of an impact right now. I think if the trend continues for another year to 18 months and we start talking about 9% interest rates, then it might have a good-size impact. But I think at this point where the rates are still works for most real estate owners.
NREI: Predictions is our last topic. Your thoughts?
Duffy: I think we are going to continue to see improvement in town. Midtown is starting to become more of a 24-hour city with residential moving there.
Elting: Gov. Roy Barnes obviously wants to be the education governor. The education issue is probably the most important problem for the city of Atlanta, and it's fueling all the issues out in the suburbs as well. If we could address our education issues, then there is no stopping Atlanta and its growth.
Senkbeil: I think there is more need for caution now than there has been in four to 10 years. I think we are going to see some economic slowdown and we've got to watch the high-tech sector. I think the one thing that we haven't talked about that could have a big impact on the whole economy is the rapid increase in gasoline prices. If those prices continue to increase, we are going to see some pretty good slowdown in the second half of the year.
Gregory: I think you will see more growth in industrial product along the south side of Atlanta. I think south Fulton County will be one of the areas that you will see more growth.
Stevenson: As industry leaders we all need to be very mindful of the next crowd coming up. The Gen-Xers are different. Our IT director is looking to hire somebody. The young man wanted to know what the stock option program was. This is an entry-level job. And he wanted to know what our food policy was.
NREI: Your food policy?
Stevenson: That's exactly my reaction. These 24-7 firms where the kids work all the time, a lot of them have food policies where they bring in food periodically and sprinkle it around. I don't think that way, but this is what the Gen-Xers are looking for in a work environment.
Patrick Duffy Managing Director Julien J. Studley
Michael Elting Senior Managing Director Cushman & Wakefield of Georgia Inc.
Henry D. "Greg" Gregory President and CEO Industrial Developments International
Bernard J. "Bernie" Haddigan Senior Vice President/Managing Director Marcus & Millichap
Nancy Leathers Director of Environment and Community Development Fulton County
Hugh McWhinnie Principal Lend Lease Real Estate Investments Inc.
Joel Murphy President Cousins MarketCenters Inc.
John Murphy Senior Vice President Cousins Properties Inc.
Thomas Senkbeil Executive Vice President and COO Duke-Weeks Realty Corp.
Phil Stevenson Executive Vice President of Development Carter & Associates
R. Mark Woodworth Executive Vice President PKF Consulting Inc.