The real estate at a crossroads has been a retail magnet for nearly two centuries. In 1837, a general store and tavern offered respite to travelers in the thinly populated wilderness. In front of this establishment, the story goes, owner and operator Henry Irby mounted an antlered deer's head for all to see. Hence, the area came to be called Buckhead, gateway to the most affluent neighborhood in Atlanta.

Stretching north and south from the crossroads is Peachtree Road, which extends south into downtown Atlanta as Peachtree Street. The main east-west thoroughfare is West Paces Ferry Road, which runs west through an exclusive neighborhood of sprawling and old gardened estates that house such prominent residents as media mogul Anne Cox Chambers and the Georgia governor. It is in this part of town that socially pedigreed ladies still belong to garden clubs and where luncheons are stylish and frequent.

From its intersection with West Paces Ferry, Peachtree Road winds through Buckhead's posh financial district, past upscale hotels to Simon Property Group's two high-end regional malls — the 821,000 sq. ft. Phipps Plaza and nearly 1.5 million sq. ft. Lenox Square.

When Atlanta developer Ben Carter came up with a bold $1.5 billion plan to remake the crossroads into a luxury mixed-use development, the area had morphed from a quaint turn-of-the-century shopping district, Buckhead Village, into a raucous 1980s night spot.

Under pressure from the recession and ailing capital markets, plans for the project, known as the Streets of Buckhead, have been scaled back to $1 billion by cutting two hotels originally on the drawing board. The project is being completed in two phases and will ultimately include 600,000 sq. ft. of luxury retail. The first phase, which includes 375,000 sq. ft. of retail and 360 residential units, has been delayed from 2009 to fall or spring of 2010.

“We have the flexibility to open either spring or fall 2010,” says Carter. “We're talking to all of our committed retailers as well as those we're negotiating with to hopefully have a consensus on when everybody would like to do it, but my recommendation is fall 2010 for it to give some time for the economy to get percolating.” The second phase will feature the remaining 225,000 sq. ft. of retail, 325 residential units and a 250-room hotel.

Carter believes that the delay will give tenants time to regroup financially and therefore negate the necessity to lower rents. He also wants to allow enough time for the project to attract the right mix of tenants. “This [project] needs to be done right the first time,” he explains. “To get the Who's Who of luxury retail is very important to us.”

Already tenants are committed to half of the project through a combination of leases and letters of intent. Another 20% of the project is in active lease negotiations. Retailers that have signed leases include Oscar de la Renta, Hermes, Etro, Bottega Veneta, Domenico Vacca, Loro Piana and Vilebrequin as well as stylish restaurants, including Japonais and La Goulue Bistro.

The development is financed with bank loans, private investors and institutional capital. The private equity comes from individuals in Atlanta with whom Carter has historically done business. Bank of America is providing the senior construction loan, and CBRE Strategic Partners IV has made a major investment of equity and mezzanine financing in the project.

The crosshairs of retail

Buckhead offers retailers a unique opportunity to tap a regional customer base. The submarket attracts not only local affluent shoppers, but it also has the added benefit of drawing consumers from the greater metro Atlanta area and from as far away as a four-hour drive throughout the Southeast. Patrons are drawn to the submarket by an array of dining selections and entertainment that ranges from jazz clubs to theater.

It is for those reasons that Buckhead retail fundamentals outperform the surrounding city. “The Streets of Buckhead has a very desirable location,” says John Leonard, vice president and regional manager of the Atlanta office of brokerage Marcus & Millichap. “We're going to continue to see some pressure on vacancies going from 12% to 14% this year in the overall market. Buckhead is probably closer to 9% to 10%.”

Weakening tenant demand will contribute to falling rents in 2009 in the metro Atlanta retail market, reports Marcus & Millichap. Asking rents are projected to drop 3.5% to $16.87 per sq. ft., while effective rents will decline 4.5% to $15.01 per sq. ft. While the brokerage does not break out Buckhead rents, Leonard believes effective rents have already fallen 3% to 5%.

According to New York-based research firm Reis, asking rents in the first quarter for the submarket that includes downtown, Midtown and Buckhead are flat year-over-year at $24.67. That compares with a 0.5% decline to $17.36 per sq. ft. in the overall Atlanta retail market over the same period.

“It certainly looks like the CBD-Midtown-Buckhead submarket is able to hold on to asking rents slightly better than the metro as a whole, but effective rents are cratering everywhere, suggesting more concessions,” says Victor Calanog, chief economist for Reis.

Stick to your guns

While Buckhead rents are faring better than those in the metro area as a whole, Calanog predicts that the submarket will still suffer from the weakness pervading retail markets around the country.

Meanwhile, local industry experts say asking rents for the Streets of Buckhead range from $60 per sq. ft. to $80 per sq. ft. Achieving such lofty rates in a submarket where effective rents ranged from $30 to $50 per sq. ft. at their peak may be easier said than done.

“That's going to be a tougher battle to fight because we're seeing rent levels drop,” says Leonard. “We're seeing in-place tenants retrade existing leases because of either financial difficulties or because they can.” Leonard, however, believes that the long-term prospects for the Streets of Buckhead are good.

One challenge looming over Atlanta retail, notes Leonard, is an estimated 5 million sq. ft. of space that is expected to come on line this year on the heels of 1 million sq. ft. of negative absorption in 2008. “So I think most projects, if not delayed, are slowing down a little bit to catch a breath in this market.”

Jon Barry, president of retail brokerage and property management for Atlanta-based Colliers Spectrum Cauble, has worked in the Atlanta market for the past 20 years. “Clearly the biggest challenge is tenants have removed themselves from the market,” explains Barry.

“Some of the major bellwether tenants, for example Target, have delayed new development for perhaps three years, leading all of the secondary tenants, the junior anchors, to follow suit.”

Weakening local economy

Atlanta's main economic drivers over the past 10 years — transportation, construction, and convention and tourism — are not functioning right now, according to economist Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

“If you take the convention tourism business, it's been hit by cancellations and companies pulling back, especially in the financial sector,” says Dhawan. “Construction, which was the lifeblood of the economy here over the past five years, has really slowed.” The volume of residential building permits, for example, today is down 90% from a year ago, he says.

In addition, as the airlines have cut back, development of a $1.6 billion international terminal has slowed at Hartsfield-Jackson International Airport. The project is now three years behind schedule.

While Atlanta's unemployment rate of 9.3% at the end of March eclipsed the national unemployment rate of 8.5%, the two numbers are equally dismal, Dhawan says. “Whether it's 8.5% or 9.3%, they're both very high so they're pretty much the same.”

Even as banks bent over backwards to make retail loans over the past five years, says Dhawan, retail sales were less than stellar.

“Now you have not only a declining retail demand environment, but from the supply side you don't have any banks in the mood to make you a loan for retail development,” he says.

As evidence of weak sales, the economist points to retail sales tax collections at the state level, which fell almost 12% during the first quarter compared with the same period last year.

Such weakness has translated into growing ranks of distressed assets in Atlanta's retail sector. A recent report from New York-based research firm Real Capital Analytics (RCA) reveals that as of April 22, 58 Atlanta retail properties were in distress due to default, foreclosure, bankruptcy filing or mechanic's or tax liens (see chart below). Those properties encompass 8.6 million sq. ft. with a value of $877 million.

At the same time, transaction volume is sluggish — only 34 of the 99 retail properties offered for sale in the past 12 months have sold, according to RCA. “The retail investment sales market has pretty much come to a grinding halt for a combination of reasons, but one of the biggest reasons is the lack of debt,” says Kris Cooper, managing director of the capital markets group in Jones Lang LaSalle's Atlanta office.

Deals that are closing are those transactions that can be completed with assumable debt or carry-back financing in which the seller receives a down payment and then holds the mortgage himself. The few lenders that are willing to finance acquisitions these days are lending at 60% to 65% loan-to-value (LTV) compared with 75% LTV at the height of the market, says Cooper.

Falling property valuations are exacerbating both the distress and liquidity problems. “Everybody knows that values have clearly declined — whether they're down 25% or 30% is very hard to tell,” says Cooper. “What we can tell is that for those deals that are trading, cap rates have risen dramatically.”

Not everything's broken

As consumers tighten their belts, Atlanta retailers and developers are following suit, according to Liz Kabat Whiteside, senior vice president and principal for Dallas-based SRS Real Estate Partners.

“It's really a matter of delaying spending capital in '09. So what was once a 2010 delivery is now a 2011 delivery,” says Whiteside, who leads the Atlanta office's project leasing team. “Preserving capital in '09 seems to be the mantra.”

SRS's strategy against this backdrop is to only take on projects that are well located and which can compete in their submarket for retailers taking space in 2010 and 2011. As an example, Whiteside points to The Park at Druid Hills, a mixed-use development that includes office, hotel and 320,000 sq. ft. of retail. The project is fully permitted and slated for delivery in 2011.

“It's a very dense area that the immediate community will appreciate having. And because it's on the interstate at I-85 and North Druid Hills Road, it will have a regional draw,” says Whiteside.

Barry of Colliers Spectrum Cauble agrees. His company is currently leasing a mixed-use project across from the Georgia Institute of Technology called Tenside, under development by Tivoli Properties.

The project consists of 336 apartments and 38,000 sq. ft. of retail. Georgia Tech is centrally located downtown, near the intersection of I-75 and I-85.

Colliers Spectrum Cauble currently has leases signed with Jersey Mike's, Smoothie King, CrossFit Atlanta, Five Guys Burgers & Fries, Nail Talk & Tan and Zen on Ten. They are also negotiating leases with Gezzo's Surf & Grill, a Southwestern burrito concept, a high-end hair salon and a pizza restaurant.

“This project has attracted significant interest from retailers as it will not only service Georgia Tech students and employees, but also the large daytime population and the dense residential population,” says Morris Coleman, vice president of retail leasing for Colliers Spectrum Cauble.

Bend but don't break

Back at the Streets of Buckhead project, flexibility is the name of the game. In addition to delaying the project until 2010, Carter asked his general contractor, Balfour Beatty Construction, to reprice the job, which has resulted in $10 million in savings. That has required “a tremendous amount of estimating horsepower,” says Jeff George, the project's manager.

Balfour, which conducted its first estimates on the project five years ago, is working to qualify the Streets of Buckhead as a silver LEED-certified project under the U.S. Green Building Council's Leadership in Energy and Environmental Design program. So far, Balfour has treated enough contaminated water to fill 21 Olympic swimming pools and excavated 450,000 tons of dirt.

Carter estimates he's paying a 5% premium to build a green project, but is confident that he's got the right man for the job. “He's done a great job for us time and time again,” says Carter, referring to the project manager, George.

Indeed, Carter and George have been working together since the mid-1980s on such groundbreaking projects as the nearly 2 million sq. ft. Mall of Georgia, which opened in 1999.

“It's really been a task to quickly be able to update Ben [Carter] and his team with accurate pricing so that he can continue to measure and make decisions and make his deals,” explains George.

“We've had to keep up with them, measuring all the ‘what ifs’,” he adds, “and trying to build a project that fits the need and the market.”

Sibley Fleming is managing editor.

ATLANTA - BY THE NUMBERS

CITY POPULATION

5.7 million (20-county area)

Source: Atlanta Regional Commission

UNEMPLOYMENT RATE:

9.3%

Source: U.S. Bureau of Labor Statistics

LARGEST PRIVATE EMPLOYERS

  1. Delta Air Lines
    25,000 employees

  2. Wal-Mart Stores
    24,243 employees

  3. Gwinnett County Public Schools
    20,822 employees

Source: Atlanta Business Chronicle

METRO AREA VITAL SIGNS

Office:

17.1% vacancy, 1Q 2009
15.1% vacancy, 1Q 2008
$17.57 rent per sq. ft., 1Q 2009
$17.92 rent per sq. ft., 1Q 2008

Source: Reis

Multifamily:

10.3% vacancy, 1Q 2009
8.7% vacancy, 1Q 2008
$761 monthly rent 1Q 2009
$762 monthly rent 1Q 2008

Source: Reis

Retail:

11.6% vacancy, 1Q 2009
9.3% vacancy, 1Q 2008
$17.36 rent per sq. ft., 1Q 2009
$18.16 rent per sq. ft., 1Q 2008

Source: Reis

Industrial:

16% vacancy, 1Q 2009
14.1% vacancy, 1Q 2008
$3.53 rent per sq. ft., 1Q 2009
$3.63 rent per sq. ft., 1Q 2008

Source: Marcus & Millichap

Hotel:

55.6% occupancy, 1Q 2009
64.7% occupancy, 1Q 2008
$48.57 average daily rate, 1Q 2009
$57.93 average daily rate, 1Q 2008

Source: Smith Travel Research

MAJOR PROJECTS

Town Brookhaven: This urban infill project is a mixed-use development in Atlanta's Brookhaven community, situated on Peachtree Road, north of Lenox Square Mall and Phipps Plaza and adjacent to Oglethorpe University. The project will ultimately consist of approximately 600,000 sq. ft. of big-box retail, junior anchors, restaurants and boutiques, as well as more than 1,500 residential units. This project is a heavily landscaped, pedestrian-friendly urban village built for convenience and accessibility.

Developer: Sembler Co.

Completion: 2010

Cost: $400 million

SouthPoint: The 600,000 sq. ft. mixed-use development is located approximately 30 miles from downtown Atlanta at I-75 and Highway 20 in McDonough, Ga. While the project is still under construction, two anchor tenants — Kohl's and JC Penney — are already open for business.

Developer: SouthPoint Retail Partners

Completion: 2011

Cost: $45 million

ATLANTA RETAIL DISTRESS GATHERS STEAM

Of the $1.7 billion in troubled Atlanta commercial real estate assets, retail makes up more than half of the properties in default, foreclosure, bankruptcy or under lien.

$ in million No. of properties Size
Office 134 9 1.4 million sq. ft.
Industrial 133 9 1 million sq. ft.
Retail 877 58 8.6 million sq. ft.
Apartment 467 43 9,176 units
Hotel 72 9 1,904 units
Development 3 1 309,320 sq. ft.
Other 13 1
Source: Real Capital Analytics