While Atlanta's fundamentals continue to lag, the city is adding more structures to its famous skyline. Despite a historically high office vacancy rate of 18%, Atlanta's Barry Real Estate Co. is building a new $50 million headquarters for power generator Southern Co., which will open in 2005. Meanwhile, Houston-based Hines will open a $125 million landmark tower on Peachtree Street for law firm King & Spalding in 2006.

Some new inventory has already come on line in early 2004, including the first of many possible towers at the Atlantic Station mixed-use development located at the nexus of interstates 75 and 85. And with a few big leases running out, including one involving a large law firm and the local office of Ernst & Young, several developers are itching to build still more projects, some of which could open just as a long-awaited recovery truly begins.

But then again Atlanta's expansion and contraction has been cyclical since the 1980s, says Leigh Martin, managing director at CB Richard Ellis. “The recovery is under way. We don't need to hit the panic button yet.”

Atlanta's recovery, if it's coming, will hinge on jobs, something every real estate sector is looking for to pull up its soggy fundamentals. Apartment landlords need tenants, retailers seek more consumers, industrial properties want more inventory and hotels are turning the bed down for more guests.

But Atlanta is a hopeful place, and many worried landlords, bored brokers and antsy developers are keeping the faith that jobs — and a subsequent absorption of office space — will come. The question is when.

Mark Vitner, chief economist at Wachovia Corp., predicts Atlanta is generally on the road to recovery and will add some 50,000 jobs this year, plus another 70,000 in 2005. Even better, much of the job creation will be in professional services, the jobs that fill office cubes. “The next three years will be very strong,” he says.

People making deals in the industry agree. “We've probably bottomed out and we expect to see improvement this year,” says Tom Bell, CEO of Cousins Properties, speaking to investors in April. “And as we see more absorption, we expect more improvement next year.”

The office leasing market is very close if not at the bottom, agrees Bob Voyles, senior vice president at Hines. Atlanta should produce 5 million to 6 million sq. ft. of demand very soon, he adds. “You hear that, and you think ‘great,’ but we have a long way to go.”

Last year, Atlanta's office sector experienced positive absorption after five consecutive quarters of negative absorption. But absorption returned to negative territory in the last quarter of the year, registering negative 161,990 sq. ft. And it spiked in the first quarter of 2004 to negative 1.1 million sq. ft. — the biggest quarter to quarter drop since 2001.

That is likely a clear signal that job growth is weak and the demand for Atlanta office space is still soft. Some companies, including Atlanta-based BellSouth, actually cut jobs during the first quarter. Vitner believes Atlanta's job recovery should absorb 3 million sq. ft. of office space by the end of the year. “It's not a lot, but it's enough to make a dent in vacancy,” he says.

Vital Signs Improve

There is reason for hope. Atlanta's unemployment rate declined from 4.8% in March 2003 to 3.9% in March of this year, according to Rajeev Dhawan, an economist with Georgia State University. The metro area's unemployment rate — 4.7% in 2003 — will drop slightly to 4.1%, for 2004 and 2005, and will then drop to 4% in 2006, predicts Dhawan. But Atlanta's office vacancy rose gradually through the last three quarters of 2003, ending the year at 17.4%, according to CoStar Group Inc.

Still, developers are optimistic based on what they're seeing on the ground. “The market is improving,” insists Don Huffner, senior vice president of Equity Office Properties Trust. “We saw no expansion a year ago. Now we are.”

Of the 10 lease deals Equity signed last year in Atlanta, six tenants kept the same amount of space, while four tenants said they were downsizing, Huffner says. Of 10 comparable deals this year, four tenants are increasing their space, five are keeping the same space, while only one is downsizing.

Concessions in the office sector also are showing signs of drying up. “I hope to see concessions burn off this year and rental rates improve next year,” says Voyles. At the same time, delivery of new product came to a welcome standstill in 2003.

As the market scratched bottom, brokers and landlords did most of their leasing deals with companies taking less than 30,000 sq. ft., says Steve Dils, senior vice president of PM Realty Group. “That's where the hiring is,” he says. Smaller companies are “taking more space to build in growth they see coming vs. downsizing and squeezing people in. But I don't see that in the larger corporations.”

More tenants are growing vs. contracting, shadow space is beginning to burn off, and “we haven't had a [tenant] default [on their lease] in awhile,” says Drew Cunningham, president of office brokerage Parthenon Realty.

Investing in Atlanta

While the city's office leasing market has been slow to recover, 2003 saw an investment fever sweep the market. What seemed like oceans of capital among pension funds, real estate investment trusts (REITs) and other institutional investors sought a relatively small number of local office properties with healthy leases and prime locations.

More than $1.2 billion worth of Atlanta office properties have sold over the past 12 months, the highest of any market in the Southeast, reports New York-based research firm Real Capital Analytics.

There's a lot of capital out there, and the question is where to invest it, says Chris Marshall, an investment sales broker at Cushman & Wakefield. “The large pension funds want the highest returns, and real estate provides good returns.”

Wells Real Estate Investment Trust paid $82 million, or $233 per sq. ft. for the suburban One Glenlake office building in June. And two towers sold for Atlanta record prices of more than $200 per sq. ft. Manulife Financial Corp. paid $118 million, or $224 per sq. ft., for The Proscenium building near the central business district. Koger Equity paid $116.5 million, or $232 per sq. ft. for Atlantic Center Plaza, another Class-A tower nearby.

And more landmark property went up for sale in the early months of 2004. Cousins announced it would market its flagship Wildwood office park in suburban Cobb County as well as The Pinnacle, a 424,000 sq. ft. tower in the ritzy Buckhead submarket. Cousins' Bell told shareholders his REIT is “racing” to reap value for its shareholders in this historic investment market.

Retail Hub

Atlanta continues to be a retail mecca, and though there are pockets of weakness as a few unfortunate retail chains suffer, the market remains strong. The retail market is “very solid, vacancies are in check and there is new construction anticipated,” says Bernard Haddigan, managing director at Marcus & Millichap. Atlanta's retail vacancy rate last year was 9.5%. “I think you'll see slight rental growth this year, and though there will be a slight increase in vacancy, it's nothing to be alarmed about,” he adds.

Lifestyle centers, power centers, grocery stores and even a regional mall are on tap for the market this year, says Kris Cooper of Cushman & Wakefield. Three million sq. ft. will be completed by the end of 2004, predicts Marcus & Millichap.

Kroger Co., the market's No. 1 grocer with 128 units and 35% market share, continues to expand into more outlying suburbs, Cooper says. That puts pressure on smaller grocers such as Ingles Markets and Winn-Dixie, the latter of which announced in May it would close nearly 50 stores in the Southeast.

Kroger faces stiff competition from archrival Publix Super Markets (with 126 stores and 26% market share), retail titan Wal-Mart (27 units and 13% share), and specialty grocers like Whole Foods Market and Fresh Market. In response, Kroger is redeveloping many of its existing sites to draw customers.

At the same time, Simon Property Group and Cousins Properties plan to build another regional mall in Henry County in suburban Atlanta.

Perhaps the most visible retail development is Atlantic Station, a 138-acre mixed-use project, which started construction on its 800,000 sq. ft. retail village this spring. The project added a 26-story condo and hotel tower this year.

Atlantic Station has signed a number of local and national retailers, including department store Dillard's, a United Artists movie theater and grocery tenant Publix. Its biggest coup may be attracting European furniture giant IKEA to the market, which will open a 366,000 sq. ft. unit in 2005.

“Atlanta is a magnet for new retailers,” and subsequently, new lifestyle centers and big-box developments, Cooper says. For example, electronics retailer H.H. Gregg entered the Atlanta market last year and helped fill up some high-vacancy power centers in the suburbs, he says.

Industrial Daylight

There may be even more hopeful signs for Atlanta's industrial market, which in 2003 saw the first positive absorption in two years. “It's improving more than the office side,” says John O'Keefe, director of leasing and marketing at Highwoods Properties. The trend is for more companies with more products to seek warehouse and distribution space, he adds.

Atlanta's industrial vacancy rate registered 14.9% in the first quarter of 2004, up from 14.2% in the second quarter of 2003, reports CoStar.

Net absorption for the overall Atlanta industrial market was negative 1.7 million sq. ft. in the first quarter of 2004. But a surge in leasing in the second half of 2003 sparked positive absorption of about 740,000 sq. ft. for the first time in two years, report CoStar and Cushman & Wakefield.

So far in 2004, Atkins Nutritional took 240,000 sq. ft. at a ProLogis park, while Del Monte Corp. leased 780,000 sq. ft. for a build-to-suit near the Atlanta airport.

One indicator the industrial sector offers growth potential: Cousins Properties and Ray Weeks, the former CEO of Weeks Corp., announced in April that they would form a new venture, Cousins/Weeks, to develop and own industrial properties, concentrating on the Atlanta market.

Intown Residential

Atlanta's apartment market continues to struggle as slow job growth brings fewer workers to town. What's more, low interest rates are enabling renters to own their own homes. After increasing for six straight years, Atlanta apartment rents declined from $631 at the end of 2002 to $618 at the end of 2003, a 2.1% drop, according to Atlanta brokerage firm Bullock Mannelly Partners.

Post Properties, Atlanta's homegrown garden apartment REIT, told shareholders in May that the multifamily market is still enduring high vacancies and concessions. The best apartments were paying concessions of about $137 per unit last year vs. $135 in 2002, reports Bullock Mannelly.

But Post, which is heavily concentrated in this market, saw stabilizing signs in the first quarter, including higher occupancy among its properties. Overall, Atlanta's vacancy rate improved at the end of 2003, dropping to 10.1% compared with 10.6% at the end of 2002, Bullock Mannelly found.

On the bright side, new apartment construction has been curtailed. New starts last year slowed to about 7,500 units compared with 9,700 in 2002, and new multifamily construction permits dropped 30% last year, according to Bullock Mannelly.

But the historically low interest rates and Atlanta's weariness of far-flung commutes have helped fuel a mini-boom in condominium properties near the city center. Condo developers Novare Group and Wood Partners announced a plan to build as many as five high-rise towers in several Atlanta submarkets over the next two years.

Hotel Occupancy Improves

Atlanta's overbuilt and under-occupied hotel market continues to struggle, though analysts are keeping hope alive. The city, with more than 90,000 hotel rooms that depend on business travel and conventions, took a beating in the months after Sept. 11, 2001. And though occupancy, average daily rates and revenue per available room (RevPAR) are all at historic lows, two new products are on tap.

The 600-room expansion of the Omni Hotel at CNN Center opened in the central business district last fall and a 425-room InterContinental Hotel will open in the Buckhead submarket in November. Last year ended with occupancy at 56.7%, while the average room rate was $75.72 and RevPAR was $42.93, reports hotel research firm PKF Consulting.

Those fundamentals should rise next year, but only by a few percentage points, according to PKF. The long recovery has been hard, “but people are starting to feel better,” says Mark Woodworth, executive vice president at PKF. The firm predicts that by the end of 2004 occupancy will rise 2.3% to 58%, while rates will climb 1.5% to $76.87 and RevPAR will increase 3.8% to $44.58.

Hope Ville

Talk to most anyone here and they will use the “h” word when they're predicting the future, particularly when they're talking about 2005. But Atlantans have been hopeful for some months, and the recovery's arrival has “been slower than expected,” says Cousins' Bell. “And it will take a while yet to recover.”

But Atlanta is a safe bet in the long run. The metro area enjoyed population growth of more than 100,000 people annually from 1993 to 2002. The area could attract 120,000 new residents by the end of 2004. And regional traffic planners predict Atlanta will add more than 2 million residents in the next 25 years.

“Atlanta has fared well coming out of past recessions, and when companies grow again, where will they grow?” asks Cushman & Wakefield's Marshall. “I think you'll see it here.”

Walter Woods is an Atlanta-based writer.

ATLANTA - BY THE NUMBERS

POPULATION OF 6-COUNTY

METRO AREA: 4.2 million

Source: Metro Atlanta Chamber of Commerce

UNEMPLOYMENT RATE: 4.2%

LARGEST EMPLOYERS:

  1. Delta Air Lines
    28,000 employees
  2. BellSouth Corp.
    23,500 employees
  3. Kroger Co.
    20,000 employees


Source: Metro Atlanta Chamber of Commerce

METRO AREA STATS

Office:

18% vacancy, 1Q 2004

Rent per sq. ft.: $18.32, 1Q 2004

Source: CoStar Group

Multifamily:

11% vacancy, 1Q 2004

10.3% vacancy, 1Q 2003

Rent per unit: $800, 1Q 2004

Source: Marcus & Millichap

Retail:

9.4% vacancy, 1Q 2004

9.6% vacancy, 1Q 2003

Rent per sq. ft.: $16.35, 1Q 2004

Source: Marcus & Millichap

Industrial:

14.9% vacancy, 1Q 2004

14% vacancy, 1Q 2003

Rent per sq. ft.: $4.28, 1Q 2004

Source: CoStar Group

Hotel:

58.6% occupancy, 1Q 2004

56.8% occupancy, 1Q 2003

Source: PKF Consulting

MAJOR PROJECTS UNDER CONSTRUCTION:

1180 Peachtree St., a 625,000 sq. ft. office building in Midtown Atlanta

Cost: $125 million

Developer: Hines

Completion: Spring 2006

Alexander Street, a 260,000 sq. ft. office building in downtown Atlanta

Cost: $50 million

Developer: Barry Real Estate Cos.

Completion: late 2005

171 17th St., a 400,000 sq. ft. building

Developer: AIG Global Real Estate Investment Corp.

Completion: May 2004