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.”