To make a long story short, metro Atlanta's long-standing success in attracting new businesses, people and development has had unintended side effects. Years of enjoying the profits from growth have resulted in the creation of what TIME magazine refers to as "the fastest-spreading human settlement in history."
Once known primarily as a premier Sunbelt center for business, metro Atlanta has become a high-profile example for the phenomenon known as "urban sprawl" earning the top spot on the Sierra Club's list of "Ten Most Sprawl-threatened Cities" in the United States.
Metro-area politicos now busily examine how to confront the sprawl-related traffic issue and the air pollution it generates. This is a particularly important task, considering that next-to-no federal funds can be used for metro-area road building until the region comes into compliance with the Clean Air Act.
Over the longer term, more cooperative planning among metro Atlanta's numerous counties and municipalities is likely in the cards. This trend has been foreshadowed by the recent creation of the state-level Georgia Regional Transportation Authority, which is appointed by the governor and charged primarily with planning and coordinating transportation projects in the pollution-plagued metro area.
Today's heightened understanding of sprawl-related problems impacts Atlanta's commercial real estate community in different ways. In the office arena, there is a newfound appreciation among many for urban office buildings inside Atlanta's I-285 perimeter highway. In spite of that, the area's suburban office boom continues to be strong as well.
Industrial development is being pushed further out geographically, and is starting to feel the effects of heavy levels of new construction. Meanwhile, metro Atlanta continues to attract retailers of all stripes, while the lodging market is showing improving occupancies and rates. At the same time, the geography of apartment development is starting to change, with zoning playing a larger role in project location decisions both inside and well beyond I-285.
Speaking on sprawl Atlanta-style sprawl has been a long time in the making, according to Clark Gore, executive vice president of Atlanta-based Holder Properties. "Sprawl started years ago, with in-town office tenants moving to the Cumberland/Galleria and North Central submarkets along I-285, at I-75 and Ga. 400, respectively," he says. When these submarkets began to experience traffic congestion, he says, the "sprawl" headed north out I-75 to the Town Center area, and from the North Central submarket up into Alpharetta.
"With newly completed interchanges in Gwinnett County's I-85 and Hwy. 316 corridors, sprawl has also gained momentum in the Gwinnett Place submarket."
The increased traffic congestion and commute times accompanying sprawl, combined with concerns over air pollution, "have served to heighten interest in living, working and playing within the same neighborhood," among metro Atlantans, says Gore.
Growing traffic also fuels interest in public transportation, as evidenced by BellSouth's recent announcement that it would relocate the lion's share of its metro-area employees near Metropolitan Atlanta Rapid Transit Authority (MARTA) rapid rail stations inside I-285. "BellSouth's move is a prime example of how these forces are influencing corporate decision-making," adds Gore.
Business decision makers may indeed be looking at Atlanta in a new light. "Our projections call for 20,000 new office-based jobs and 4 million sq. ft. of absorption in metro Atlanta for both 1999 and 2000," says B.W. "Bick" Cardwell, president of Colliers Cauble & Co., Atlanta. "But, this growth comes at a price. We would be foolish to think that the strategic planning taking place in major firms here isn't taking into account our transportation and clean air concerns."
Speaking from his standpoint as a developer of Atlanta-area industrial space, "Sprawl is usually not a factor in the location decisions of industrial users," says John McDonald, president of McDonald Development. He adds that, when choosing a submarket, most space users have very specific reasons, such as proximity to transportation arteries, coverage of a particular distribution area and employee base.
Although spreading development does not affect site selection, McDonald adds that the construction certainly affects land availability. "This development has absorbed a lot of land that would have otherwise been used for business and industrial parks," he says. "As a result, land supply for northside industrial development will become more of an issue as the suburbs continue to expand northward, while the southside, which still has plenty of land suitable for industrial use, should benefit."
The case of land surrounding the Mall of Georgia, a 1.7 million sq. ft. regional center under construction some 20 miles outside of I-285 in Gwinnett County, is a prime example, according to Scott Helms, vice president of marketing for Atlanta-based Industrial Developments International's (IDI) eastern region.
"Given its proximity to I-85, this site was originally more suited to industrial development," he says.
But, with the enormous population growth in the immediate area, the property became a prime candidate for retail development, says Helms. And when that happened, he says, "Surrounding properties became too expensive for industrial development, pushing that type of development further out I-85."
Under current conditions, sprawl will continue to be a factor in the evolution of the Atlanta industrial market, according to Helms. "Industrial space users will continue to want to be close to their labor base, especially their inexpensive labor," he says. "Sprawl is also forcing this base to move further and further out."
According to Morris Ewing, principal and managing director of Trammell Crow Co., Atlanta, problems generated by sprawl will not be solved overnight, but at least they are being addressed. "Atlanta has finally reached the point where the business community, non-profit organizations and government officials are all focusing on Atlanta's growth, traffic and air quality problems. Everyone is working together on solutions," he says.
These solutions may effect some significant changes in Atlanta's real estate development marketplace, according to Ewing. "There will be fewer roads and more mass transit built in Atlanta," he predicts. "The planners will be much more in control of the development process, while zoned and existing sites will command a premium. All of this may make the developer's job more difficult, but it should provide an orderly process for growth that will allow Atlanta to continue to be one of the premium growth cities in the nation."
Addressing the problems generated by sprawl is just the latest in a long line of challenges metro Atlanta has had towith over time, according to Bo Jackson, executive vice president of Birmingham-based Colonial Properties Trust, an owner of suburban Atlanta office space. "And typically, the business and civic communities come together to find viable solutions," he notes.
Office market refocus? >From an investment standpoint, 1998 was a somewhat slower year in the >local office market than 1997. According to statistics from Atlanta-based >Westminster Group, the total number of office building sales remained >constant at 106 for both years. Dollar volume decreased, however, from >$2.4 billion in 1997 to $1.7 billion in 1998.
On the leasing side, according to statistics from Cushman & Wakefield of Georgia, the 100.7 million sq. ft. Atlanta office market was 12.3% vacant as of year-end 1998. The market as a whole enjoyed nearly 5 million sq. ft. of net absorption during the year, according to this Atlanta. Meanwhile, new space deliveries totaled nearly 7 million sq. ft. - all but approximately 1 million of it in the suburbs.
According to Bradley Fulkerson, vice president, office brokerage for Atlanta-based Carter & Associates/Oncor International, user demand may well be changing. "Several large, 50,000 sq. ft.-plus office tenants which we are advising have shifted their focus from Atlanta's suburbs to closer-in submarkets," he says, adding that the accessibility of MARTA locations will continue to answer the traffic question.
"The suburbs are increasingly more congested with traffic and are not capable of handling the volume," says Fulkerson. "The labor markets are much tighter in the suburbs than those in submarkets with extensive public transit systems."
"Companies located far north of Atlanta are having trouble finding qualified employees," says John D. Shlesinger, executive managing director of Insignia/ESG Atlanta. "They have cut themselves off from the large labor pools that are located in the western, eastern and particularly in the southern suburbs," he notes.
Labor issues, as well as growing concerns about air quality and possible governmental regulation to reduce emissions, "will make nearby public transportation access increasingly important," says Shlesinger. He cites BellSouth's recent decision to relocate 13,0000 of its 19,000 Atlanta-area employees to facilities along MARTA lines as a "great example of this growing trend."
Office space users seeking transit-proximate urban locations in Atlanta have several facilities from which to choose, with more on the way. In the 13 million sq. ft. downtown Atlanta market, where Cushman & Wakefield reports a year-end 1998 vacancy rate of 19.3%, a partnership comprised of Portman Holdings and SunTrust Bank has announced plans for a new, 650,000 sq. ft. office building. Situated on top of a garage next to the existing 1.2 million sq. ft. SunTrust Plaza, SunTrust Plaza Gardens is slated to open in 2000, and will reportedly be approximately 40% occupied by SunTrust.
Immediately north of downtown in the 10.6 million sq. ft. Midtown market, a 5% vacancy rate is indicative of an utter lack of speculative office space development for several years. Atlanta-based Dewberry Capital Corp. aims to fill at least part of that void with Peachtree Pointe, a 165,000 sq. ft. development scheduled to open this fall. The project could ultimately include more than 450,000 sq. ft. of office space, along with possible hotel and condominium components.
In the 10.5 million sq. ft., 11.4%-vacant Lenox/ Buckhead market, Holder Properties and joint marketing partner Equity Office Properties are wrapping up work on Prominence, an 18-story, 430,000 sq. ft. tower. No major preleases have been announced as of yet. Meanwhile, Atlanta-based Regent Partners reports that its recently opened 260,000 sq. ft. Tower Place 200 office building has hit the 70%-leased mark.
Urban mixed-use With existing Atlanta-area highways in non-compliance with air quality standards, any meaningful new road construction is a long way off. Subsequently, interest in mixed-use communities that allow people to live, work and recreate within a limited area has increased.
The Atlantic Steel project is one development that responds to that interest. The project is a 144-acre site at the I-75/I-85 interchange just north of downtown Atlanta. In late 1998, Atlanta-based Jacoby Development Inc. signed letters of intent with several partners to redevelop the former steel mill property as a mixed-use development with residential, office and retail components. Project partners include Post Properties, Atlanta; The Mills Corp., Arlington, Va.; and Houston-based Hines.
The Atlantic Steel redevelopment is slated to progress over a number of years, and is awaiting regulatory approvals for the construction of a road connecting the site with downtown.
Suburban office The urban, inside-285 portions of the Atlanta office market may indeed be getting more popular with developers and users alike. But the suburban markets are still doing quite nicely, thank you. And few are as dynamic these days as north Fulton County's upper Ga. 400 corridor market, comprised of 6.4 million sq. ft. of existing space operating at 10% vacancy, with some 2 million sq. ft. of it delivered in the past year.
There are a number of good reasons for the growth of this market, according to Shlesinger. "There is an abundance of land; plentiful parking; nearby, cost-effective executive housing; and demand for custom facilities with large, efficient floor plates," he says. "As real estate costs continue to rise, this market will continue to be the location of choice for back-office operations such as call centers, operations facilities, and the like."
The emergence of North Fulton as a major Atlanta office submarket began in late 1992, according to Cushman & Wakefield managing director Char Posey. "When the economy turned the corner, the pressure of corporate expansion began building when no new construction was underway in Atlanta," she recounts. "At the same time, vacancy rates were in single digits for the first time in 10 years, and rental rates were spiking after years of generous concessions."
According to Bo Jackson, office tenants enjoy this city. After completing the purchase of 500,000 sq. ft., 100%-leased Mansell Overlook in late 1998, Colonial Properties Trust surveyed the project's tenant base. "Approximately 75% of the tenants are forecasting that they will have a growing workforce here during the next 12 to 24 months," reports Jackson, adding that 85% of them see North Fulton as an ideal location for their businesses. "The survey results tell me that, not only do responding tenants like this market, but how they get to and from their jobs must also be working well for them."
While this market has been absorbing copious amounts of new space, there may be some preliminary signs of softening, according to John Decker, a partner with Atlanta-basedChildress Klein Properties. Decker's company is leasing the 150,000 sq. ft. Preston Ridge III.
"We are not getting the same credit profile for tenants for this building compared with the two previous phases," he says. "We are putting in a little bit extra on tenant finish allowances compared with a year ago," he reports. Taken together, these trends "represent very slight changes in the strength of the overall market. They are things you like to keep your eye on, but nothing that causes a great deal of worry."
South and east of the upper 400 corridor in the 20.3 million sq. ft., 11%-vacant Central Perimeter market, mixed-use development with a residential anchor is on tap at Hines' 3003 Summit Boulevard project. Located within the 83-acre Perimeter Summit development that is currently home to the southeastern regional headquarters of Hewlett-Packard, the project will feature "buildings with retail on the first level and apartment homes on the top five stories," according to Hines vice president John Heagy.
"There will be offices within walking distance across the street from these buildings," he reports, along with an on-site hotel. "As Atlanta continues to grow, we are seeing a lot more emphasis on mixed-use projects with both office and residential components. A lot of businesses view this kind of environment as being very positive for their employees."
Industrial Notes According to Atlanta-based King Industrial Realty's fourth-quarter 1998 Industrial Availability/Activity Report, the 367.6 million sq. ft. warehouse/distribution sector of the local industrial market was 15.2% vacant at the end of the year, the highest point since 1992. Meanwhile, the 14.9 million sq. ft. service center sector was 12% vacant. While sales/leasing activity of some 11.7 million sq. ft. during 1998 represented an increase over previous years, the report adds, "tenants are moving into the new space at the cost of the used space market."
"The Atlanta industrial market appears to be on a plateau of sustainable growth whose only enemy is overbuilding," according to King associate Bob Burdell. "If construction levels taper off and activity levels continue, then Atlanta could reverse the climb in availability."
"I think the market is starting to soften up some," says Ernie Baker, vice president, commercial properties for Atlanta-based Richard Bowers & Co. "We are getting to the point where things are getting overbuilt, especially in the bulk warehouse sector. The smaller buildings, 50,000 sq. ft. and below, are doing great."
Concessions are cropping up in the local marketplace, reports Baker. "Landlords are getting aggressive when there is a big deal to be had and offering free rent, which we haven't seen here in the past six or seven years," he says. The oversupply of industrial space exists throughout the Atlanta market, adds Baker, "but they're still building."
Grubb & Ellis senior vice president John Phelps is a bit more sanguine about the situation. "Atlanta has always been one of the nation's prime growth markets for industrial product, and all the investors want to be here," he says. These investors are a more cautious lot than they were three or four years ago, according to Phelps. "They want product in select industrial markets, which traditionally have been the Northeast/Gwinnett County, Northwest and Airport markets," he says. But, thanks to continued expansion of the local industrial marketplace over the years, adds Phelps, "those 'select' markets have grown to include places like Conyers, Douglasville, Fairburn, and McDonough."
Retail details Three major trends are currently at work in Atlanta's retail marketplace, according to Larry Pantlin, Trammell Crow's principal and managing director for retail development. In the neighborhood center portion of the market, he says, "Continued consolidation in the supermarket industry, with major chains buying each other out and jockeying for market share, pose challenges to existing center owners and potential opportunities for developers.
"Retail big-box centers are reaching saturation levels in the metro area," he continues. "Strong sales are still driving expansion plans, although at a slower pace. Also, zoning and sewer moratoriums are becoming major concerns for developers and retail owners themselves in outlying suburban areas."
"The big challenge for retail development in Atlanta these days is finding a site you can afford," says Linda Rains, executive director of the retail services group of Goodman Segar GVA, Atlanta. "There is only so much dirt left these days, and it's all very expensive - both inside and outside I-285."
And when it comes to existing centers, times are good for landlords, says Rains, noting that, "New retailers are constantly coming to the market to fill up space as it gets vacated."
Active retail submarkets for strip and freestanding shopping center development in the Atlanta metro area include North Fulton's upper Ga. 400 corridor, Fayetteville and the area surrounding the site of Mall of Georgia in Gwinnett County, according to Rains. "Midtown is also very hot," she adds. "Many mall retailers such as AnnTaylor, The Gap and Old Navy Clothing Co. are all trying to establish locations in that market."
According to statistics provided by Goodman Segar GVA, the 105.7 million sq. ft., 1,415-center Atlanta retail market was only 8.2% vacant at the end of 1998. Nearly 6 million sq. ft. of space was under construction at that point, with some 2.6 million sq. ft. of this space reportedly preleased.
Major new centers under development include the aforementioned Mall of Georgia, where an August 11, 1999 opening is scheduled. The project, a joint venture of Atlanta-based Ben Carter Properties and Indianapolis-based Simon Property Group (inherited by Simon after its acquisition of Corporate Property Investors), is being developed as part of the 500-acre Mill Creek Georgia mixed-use project. The project will be anchored by Nordstrom, Dillard's and JCPenney, with a 20-screen theater, a seven-story IMAX, Galyan's Trading Co. and Barnes & Noble rounding out the tenant roster.
Other new retail projects in the metro area include the nearly complete Avenue East Cobb, a 236,000 sq. ft. suburban center being developed by Atlanta-based Cousins Properties Inc. The second of Cousin's new upscale "Avenue" retail product type (the first is in California), The Avenue East Cobb will be tenanted by retailers such as Abercrombie & Fitch, AnnTaylor, Brooks Brothers and Talbots.
Meanwhile, in Lenox/Buckhead, The Sembler Co. of Atlanta is building Lenox Courtyard, a three-story, 400,000 sq. ft. center featuring Galyan's, Publix, Staples and Uptons. Designed by Atlanta-based Ozell Stankus Associates Architects, the project is due in November.
Apartment and lodging trends It is a good time to be an owner of apartment properties in metro Atlanta, according to Jay Clark, president of locally-based Apartment Realty Advisors. "Occupancies and rent collections have both been increasing since the summer of 1998," he says, adding that investment options are slim. He estimates that 1999 apartment complex sales volume hit the $150 million mark in March - a figure he describes as "good, but not great."
Capital markets turmoil late in 1998 put a damper on the number of potential buyers in the market, he says, "but now we're seeing them come back."
Atlanta's sprawl crisis and its attendant traffic crunch are also having an impact on apartment valuation, notes Clark. "The closer your product is [to Atlanta's urban core], the more buyers are willing to pay," he says. "Also, the cap rate decreases dramatically compared to that for a typical suburban apartment complex deal. But don't thank the developers; if they could get the money, they'd screw it up in a minute."
Sites with the right zoning are indeed hard to come by in the Atlanta market, agrees Elliott Lewis, president of Atlanta-based Watermarke Companies, developer of upscale multifamily projects in the Southeast. "Land prices have been soaring, and trying to find an A-plus location is very difficult," he notes.
The time is equally good for Atlanta's hotel sector. Citing figures from industry source Smith Travel Research, Landauer Associates senior managing director Mark von Dwingelo notes that Atlanta-area hotel and motel occupancy increased in 1998 over 1997 levels.
"Atlanta finished last year at 64.9% occupancy, up 2.5% from 1997," he says, with a $78.02 average room rate reflective of a 2% increase during the same period. "Despite the widely held belief that overbuilding was rampant in Atlanta, demand growth exceeded supply growth, resulting in an increase in market-wide occupancy."
"It's not New York City, Chicago, or Orlando, but Atlanta is a very healthy hotel market," says Mike Leven, president and CEO of Atlanta-based U.S. Franchise Systems Inc. He adds that, as a relatively low-priced market for years, Atlanta has experienced improving room rates recently.
"Tremendous suburban growth has created much more of a weekend business," he says. This, combined with strong local convention and meeting industries, are building "a seven-day a week hotel city. When you go from a four-day to a seven-day city, your hotels become a lot more valuable.
"There is more extended-stay product in Atlanta than anywhere else, and it has done extremely well here," continues Leven, adding that lack of capital is usually the only restraint on building. "I really don't think you will see nearly as much hotel construction in the Atlanta market during the next two or three years as you did in the past. However, hotel people are just like their counterparts in office or apartments," he says. "As long as there is money, they will build."
As Atlanta market experts come down on either side of the suburban sprawl debate, all sectors of the market remain energized. Cranes of all sizes are likely to dot the skyline for many months to come.