It has been years now since it was dubbed "America's Olympic City," but Atlanta has long been the most dominant real estate market in the Southeast.
In honor of that fact, National Real Estate Investor and Southeast Real Estate News recently gathered a panel of local Atlanta real estate experts to air their views on the state of the area's real estate sectors. It was most enlightening.
Q: Atlanta's office market has been on an upswing for a number of months. Can we expect that to continue?
Richard Bowers: Atlanta is going to continue to grow and expand in the office arena. Some of these developments that are planned, particularly those up Georgia 400, are going to be successful, primarily because of the growth that has occurred in that market, with the opening of North Point Mall and the fact that I think 400/I-285 is experiencing congestion, issues that are going to result in some people considering moving north of there. That evolution is going to continue.
The other thing that I think will make that market successful is the fact that rates from $19 to $21 can be let for Class-A space compared to those alternatives at 400 and 285. 1 think Monarch Tower will be quite successful.
Buckhead, since the opening of 400, has been an interesting market from the standpoint of an open area that perhaps is more friendly or more acceptable than some other areas of the city. There are great amenities in that market - hotel, retail and restaurants. Candidly, I think Buckhead is less congested right now than the 400/285 market.
If I had any comments on downtown, I think after the Olympics you're going to have more space downtown than exists today, with not only the Olympics but the Federal Center, with tenants moving out of 101 (Peachtree), Pershing Point Plaza, the Peachtree 25th building and Renaissance Center. But I also think downtown is going to be a good market in the future. It seems to me, having been downtown yesterday, there's more activity downtown right now so far as construction and activity than in any submarket in the city. I also believe that downtown is currently more accessible than a lot of people give it credit for. I everything comes to fruition that is going on down there, downtown is going to be a really exciting and dynamic place to be.
Gail Peeler: I agree that downtown is more accessible. The Buckhead Loop has been tremendous, a great deal of help for Buckhead, but downtown is still probably the easiest market to get in and out of. And because of the Olympics, for the first time downtown Atlanta has looked at reuse of buildings. You've got office buildings being turned into hotel suites, possibly office buildings turned into residential lofts. Typically in Atlanta the growth has gone north but, because of the Olympics in that concentrated area, whoever comes into these renovated buildings is going to have a structure that somebody put millions of dollars into to renovate and they're going to have a much better chance of success going forward with whatever use they do.
Plus the absorption downtown has been very strong. We're almost matching what we're losing. Absorption year-to-date is almost 600,000 sq. ft. in Class-A. I think downtown will hold its own and will be better than most people think. There is not going to be a big recession or depression once the Olympics leave, like people are predicting.
Q: Do you think the rates are going to hold up after the Olympics?
Peeler: Class-A rates have gone up for the first time in three or four years. Jamison (Research) predicted they will go up 6%, but I think that's a little aggressive. When we talk about rates going up downtown, we still never equal the suburbs. Rates have typically been lower and you still get a better value downtown.
Bowers: I think that's one of the reasons downtown will be successful is the rate structure. It will be $6 to $7 less than the suburbs and I think a lot of people are going take a look at that.
Mike Shelly: We've seen a lot of activity at Peachtree Center. I agree with Gail and Richard that there are a lot of great things going on, and I think fundamentally that downtown even after the Olympics has still got a lot of positive strengths in terms of what kept Atlanta in the position it is downtown, unlike a Houston or a Dallas that has seen a further decline.
Q: Are you active in the new Downtown Development Group?
Shelly: Yes, we are and so is Gail. It is a good nucleus of owner/representatives who are trying to work together to market downtown.
Marketing downtown has been an interesting process. We've got a lot of entities that exist that are in place to market their respective interests, particularly in the hotel and convention industry. The Downtown Development Group is focused on ownership issues relative to marketing Atlanta as a place to work. We've got more people working downtown than ever before. We've never had that net loss of worker population. We continue to enjoy the convention industry with 3 million visitors a year and we continue to enjoy the fact that we have two down-town universities with 35,000 daytime students. If you combine our federal, state and local governments, we have one of the largest segments of that population outside Washington, D.C. So there are a lot of stabilizing forces that should put it in a position after the Olympics to go forward.
Q: Will there be a lull after the Olympics?
Shelly: There will be a lot of activity and I don't think there will be a lull. There will be a lot of space absorbed. There will be some creative solutions. We've already seen four or five housing projects announced in the Fairlie Poplar district, whether they are apartments or loft apartments. That's an exciting possibility.
I think the thing most city planner-type people look at as it relates to down-town is where is the residential housing, can it happen and will Atlanta have a fighting chance to become a 24-hour city, and if it can do that then we'll be even more special than we are today. The school's still out on that.
France: The upside for downtown Atlanta on the residential side is going to come based on the influx of people coming from cities that do have downtown residential. I think it's a matter of changing the mindset. If you're dealing with people who were born and raised in the South or in Atlanta, I think the mindset would be to not have residential downtown. But the more people who keep coming here from areas that do have downtown residential, it does offer some upside that way. I would say the No. 1 drawback is the security aspect of being downtown. Atlanta has got to do some strong pr and, more than that, they have to take some strong action to change.
Peeler: One of the things that's changing that is we are voting on a downtown improvement district. It will probably happen. They're putting plainclothes people on the street linked to the Atlanta Police Department. These people are going to be downtown to monitor the homeless, taking graffiti off the walls, picking up trash. We are hoping that will come through and I think it will make a major difference.
The other thing about the perception of crime is they take all of the crime statistics and they apply it to the 400,000 people who live downtown and they ignore the hundreds of thousands of people who come downtown every day to work. If you really base it on the population that is in downtown every day, the crime in down-town Atlanta is, I think, less than Buckhead, because in Buckhead you have all of the Saturday night activity happening around the bars. So the crime statistics really are not correct.
L. Frederick Glass: I think the best thing going for downtown is the tight market in the suburbs. It's going to be difficult for a large space user to get a big block of space without doing a build-to-suit. There are going to be some fantastic opportunities for large users to make deals downtown. There's just not going to be the quantity of spec space to enable these guys of 50,000 sq. ft. or 100,000 sq. ft. to go and make a deal.
Secondly, I think Georgia State is a huge plus for downtown;
Q: Moving north like many Atlantans, we see North Point Mall, Office buildings, power centers and more. Where is that market going? How big is it going to get?
Vipin Patel: The area from North Point Mall up to Windward Parkway will be an office corridor. We also have 230 acres on the west side of Georgia 400, all zoned for office. There will be a major road built there, so there is a lot of space that is going to open up. That's where our office park is going to be actually, on the west side. But it will not be built anywhere close to the densities of Perimeter Center. There the densities are 40,000 to 50,000 sq. ft. to the acre, all with deck parking. You are going to see smaller six-,seven-, eight-story buildings. I don't think you'll be seeing 300,000 to 400,000 sq. ft. buildings. The average density will be somewhere between 15,000 and 18,000 sq. ft. to the acre. But it will take years and years to get to the size of Perimeter Center.
Q: Do you think that's because of the residential that's already out there? It seems similar to Dallas, where there is all of this land and it keeps growing and growing. You say there won't be any high-rises, but will that continue?
Patel: Into the foreseeable future. Now if somebody comes to us in five years and says I want a 20-story building, we'll build it if they pay for it.
Q: What would justify that?
Patel: It's pure economics. When you don't have that land value, there is no point in building.
We are seeing a trend that we had not anticipated when we started our building. We thought we would see a lot o 5,000 and 10,000 sq. ft. tenants. We ain't seen one 5,000 foot tenant. All we've seen is 20,000 and 40,000 foot tenants.
Glass: Vipin, if someone came along and wanted 100,000 sq. ft. on a 10-year lease, what would you build?
Patel: Probably about 150,000. There I would have a spec component because I can still compete on the rents.
Glass: A 10-year lease would work?
Patel: On a building like that, we are debating whether you would build on a 10-year lease or not. The financing people are still going to be fairly tough.
Q: Are you seeing a lot of shorter term leases?
Patel: Yes, five and six years. Even major tenants with 40,000 and 50,000 sq. ft.
Q: What changed the mindset? I thought 10 years was the norm.
Char Fortune: I think the company of the 1990s is a different company than we had in the 1980s. They're smaller, leaner and more flexible and they know how big they're going to grow.
Relative to North Point, if you look at the demographics of Alpharetta they will rival Buckhead. Household income is something like $80,000 annually, which is a huge number. And what fuels that residential growth is a lot of the entrepreneurial companies who are making the big money. They generally are companies that don't require a lot of business-to-business activity that used to be in the North Central or Buckhead market. They can sustain their business in an area like North Point - it's close to home, the rental rates are attractive, it's a new building, and all of those things work for them. I think the demographics of that area are just phenomenal for the type of development that Cousins and others are doing out there.
Glass: They're not looking for a monument, they're looking for a good work space.
Patel: We're building basic space. We're not building monuments.
Fortune: And I think that's another cycle that we're in. The '90s are different than the '80s, and the expectations about what an office building should be are different. The glitz and glamour and sizzle that we did in the 1980s with a half-million sq. ft. building are not in demand now from any sector. We've got supply and demand pretty well in check now, and the capital markets really are the only thing that are still out there.
It's interesting that of all the major announcements made early this year, not very many of them have come to fruition. But the ones who have decided to build have been and will be successful. There is not much spec space on the market, they're substantially preleased and the risk is less than if you build half a million sq. ft.
Q: What is it that is really driving Corporate America to outsource its real estate services?
Fortune: Corporate America in the last 10 years is looking to reduce ito overhead. They want to do more work with less people and less space. That has some implications for owners. First of all the parking density goes up. So if you're going to build surface parking you need to have more of it. Or if you build deck parking you need more of it. All of which is expensive. So in order to keep the costs down, you've got to build a less-glamorous building, one that is utilitarian.
With respect to office space, we see a trend toward much more open floor plans. I haven't seen in Atlanta any hoteling. You hear a lot about that buzzword, but I have to tell you if it exists here in Atlanta ...
Patel: It does, with the accounting firms. They're all using client space now.
Q: Tom McAuley, you're one of those who's contemplating building a spec office building up at the Concourse development
McAuley: Yes we are. I saw an article yesterday called "The Great Sucking Sound," talking about what North Fulton was doing to the North Central market. We plan to do something of about 600,000 feet. We recently got zoning for 1.9 million sq. ft. for all of the Concourse project. And of course we are involved in the North Point project.
At Concourse today, for defensive reasons, we think we have to build. We've got internal demand projected out for the next three years for tenants who are located there for expansion. If we're not able to accommodate those we will lose them. The wild card is the traffic. It continues to get worse every day and the tenants continue to complain about the traffic. Once the collective distributor road is in place, with an exit north and south on Georgia 400, that will alleviate some of the traffic.
We really expect our client, which is Teachers, to go ahead some time in the third quarter and approve the building of 600,000 sq. ft. Now, I say that, but Yarmouth Group has purchased a property directly across the street at the Lakeside Commons project, and they swear they are going to come out of the ground with 300,000 sq. ft. regardless of what anybody else does. Then Prentiss just to the south of us ...
Fortune: They have 250,000 sq. ft. planned.
Glass: Have you burned off your sublease space at Concourse?
McAuley: Today we are 100.6% occupied at Concourse.
Glass: Who's the .6?
McAuley: It has to do with the load factors ...
Shelly: He's got some day rates up top!
Patel: You know, regarding the idea that North Point is the great sucking noise and north of Perimeter being great competition, the Perimeter Center market is what, an 18 million to 20 million sq. ft. market? For anything north of Holcomb Bridge Road to get to 2 million sq. ft. will take several more years. It has an inherent growth of 3% to 4%. So I don't think that market is any competition to US.
McAuley: What we're seeing is that in order to get a major anchor of the size you need, instead of a gazelle type, the 5,000 to 7,000 sq. ft. tenant, they're really evaluating going up and building a two-story building with surface parking versus anchoring a building like we have at Concourse where the rents are going to have to be $25 a foot.
Patel: But that's an economic issue. It's not a traffic issue. There are so many people living north of Holcomb Bridge Road that there is going to be demand in that area, irrespective of Perimeter Center.
McAuley: But Vipin, you look at the amount of land that is still in the North Central market between the Concourse project and the North Point project and you've got a tremendous amount of land that is ready to be built on right there.
One of the conditions of our zoning is that we would provide a shuttle service twice a day to the MARTA station. We surveyed our tenants and less than 2% of them want it.
Q: Jim Jacoby, you've developed a strip center or two in your time. What is the Atlanta retail market up to these days?
Jim Jacoby: Actually, our latest two projects are up in the Maryland area, but we have three Wal-Marts under construction in Georgia right now, one in Riverdale, which just opened, one out in Dallas/Hiram and one at Perimeter (Center), which will open in October. Of course, in the Perimeter market the land values make it pretty difficult to do retail. Just recently there has been a flurry of new retail there. We find there is a tremendous demand for retail in the Perimeter market. There are still tenants standing in line to get out there.
Q: Anybody worried about overbuilding?
Patel: This retail is actually replacing a lot of other retail. Unlike office buildings, retail has a locational value and the tenants we are dealing with essentially are value-oriented tenants who don't have the sizes available to them. All they want to do is put somebody else out of business.
Q: How many of the same type of retail store can you build? How much is enough?
McAuley: You're already seeing a lot of consolidation, with Sports Town, Sports Authority. PetsMart, PetStuff.
Q: What makes Atlanta such a unique retail market?
Patel: At North Point, in a period of 12 months, we turned down almost 2 million sq. ft. of retail. And the sales are good; even in the power centers sales are almost $200 per sq. ft.
We are building at (highways) 120 and 316,500,000 sq. ft. opening this October, which is not that far from the mall.
Jacoby: I think Atlanta is the most competitive food store market in the country. We go up north to the Washington, D.C., area, and Giant Food has almost 50% of the food business up there. Atlanta is such a young city with all different directions to grow to and the new malls and the new power centers. When you go up north there is very little land and it is very difficult to develop up there. They just put so much pressure on you infrastructure-wise and so forth. That's one of the reasons there is so much going on here in Atlanta. It's a fairly easy area to develop in.
Q: What makes Atlanta such a unique restaurant market?
Fortune: We have some land on Ashford-Dunwoody Road at Meadow Lane in front of the Ashwood office building, about 10 acres, and we've had an unbelievable number of phone calls from restaurateurs wanting to put restaurants on that site. From the Wolfgang Pucks of the world to fast food, it's incredible the amount of interest in that market.
Jacoby: We probably turned away at least a dozen major restaurants that wanted to come to our two outparcels. They were just standing in line. Let's face it, in the Perimeter area, what's the waiting time for lunch? It's a 45-minute wait.
Fortune: We start at 10:15 now for lunch.
Patel: We thought a lot of the restaurants at North Point would have problems at lunch, and because of the bedroom communities around there they would do very well at dinner time. But they are all doing fabulously at lunch time.
Fortune: In the North Central and Perimeter Center area the office development is stunted by all of the traffic, but retail thrives on it. These restaurateurs have done their demographics. They know who their customer is and they can do a heck of a business for lunch from the office community and with all of the residential in the area they've got dinner covered too.
Q: Industrial is another how market segment. How is Atlanta's industrial market stacking up?
Bowers: It's a tight market. There's not a whole lot of space around. Occupancy levels are right around 95%, and my industrial guys are having a real problem finding space. A lot of submarkets, and even some of the new buildings that are under construction, are pretty well leased. So it's a strong market.
Q: Build-to-suits are still the order of the day?
Bowers: I think build-to-suits is a great opportunity for both industrial and office for those tenants that can commit to a long-term lease. Candidly, they can make a better deal if they have the financial credit than many of the existing spec buildings or the buildings that are Class-A along the Perimeter.
Glass: We're having the best year we've ever had in industrial and almost all of it is either build-to-suits or building sales or land sales. We're just not seeing the bread-and-butter type deals, the 10,000, 15,000 and 20,000 sq. ft. deals. We're seeing a lot of consolidations. Atlanta is a huge magnet as a distribution center you do have five or six developers that can build spec space, but they're building for the big boxes. There's an incredible among of activity in industrial and the rates still seem to be holding up. There doesn't seem to be a threat of over-building at this point.
Q: Technology is impacting the real estate business in a big way. How important are the new software programs in your work?
Doug White: I think the institutions are turning all of the property managers into asset managers. They're wanting more and more information. I had a small development company with a small management operation and I joined Pinnacle Realty out of Seattle to give them a presence in the Southeast, particularly in Atlanta, primarily because most of the institutional investors were concerned about dealing with a small non-national company.
Glass: The bulk of the property management we've picked up in the last year or two has been owner-occupied, which is a result of outsourcing. People decided they could get outside vendors to manage their property cheaper than they can. Multitenant stuff doesn't turn over as much when the market is this good.
Peeler: Our clients want us to communicate with them through E-mail, and we've got to have all of the sophisticated technology just to communicate with them.
McAuley: We're going to spend almost $1.4 million this year on technology to communicate with the client, the same thing Gail is saying. We've installed LotusNotes. Unfortunately, we have to run about 12 different programs, MRI, Skyline, Timberline, CTI, then the Equitable version of Skyline, the Equitable version of MRI, the Teachers version of... Everybody's got their own versions. They are requiring us to do so much financial forecasting that we have three full-time asset managers to do nothing but cash-flow projections for our institutional clients.
White: I think the only way that we're able to survive in that environment is by getting more work out of fewer people, because of the technology. With some of the larger financial management companies I was surprised that their technology was a lot less than mine was. At Pinnacle, we have a technology called "the cloud," and we're hooked in with AT&T where we send everything out on the computer and it goes out into the sky and then it lands on somebody's desk. The danger in that is that yesterday I could not get into my E-mail. I still like picking up the phone.
We are hooked into Phoenix Realty Group with the MRI so that we send them an electronic transmission every month. However, the problem s we're still producing the quarter-pounder, the half-pounder and the two-pounder reports, depending on their level of need. I'm not sure at what point we'll quit sending those reports.
McAuley: With the regional offices we have, we're using LotusNotes to communicate. All of the leases are on the computer. So instead of a package sitting on my desk, it's there to make any comments on as it goes through the property manager, the asset manager, the owner.
Glass: A lot of us are learning how to type.
White: Pinnacle took over the management of InterGroup's apartment portfolio, and I know there was a substantial savings for them because of that change. That could be a trend.
Richard Bowers, president Richard Bowers & Co. Char Fortune, vice president ARES Inc. Jerry France, publisher National Real Estate Investor L. Frederick Glass Jr., executive vice president, Carter Jim Jacoby, president Jacoby Development Co. Thomas McAuley, regional partner Faison Vipin Patel, president, COO Cousins Properties Gail Peeler, vice president Compass Management and Leasing Mike Shelly, president The Parthenon Group Douglas R. White, vice president Pinnacle Realty Management Co.