The capital city of the South is notorious for its commercial real estate booms and busts. During the recent financial unpleasantness, Atlanta’s price per square foot for office space has fallen by 50% since the peak of the cycle in 2007.
Just last year, the city’s average metro office vacancy rate topped 20%, according to Elizabeth Warren, chair of the Congressional Oversight Panel established by Congress in 2008 to oversee expenditures of the $700 billion Troubled Asset Relief Program (TARP).
“These [market] declines have severely threatened bank balance sheets, contributing to the failures of 30 Georgia banks since August of 2008, more than any other state in the nation,” Warren said at a field hearing at Georgia Tech in late January. “Many experts believe that Atlanta’s experience could foreshadow a problem that could echo across the country.”
Indeed, growing distress in Atlanta’s office market will impact the health of more local and regional banks as more borrowers are unable to make debt-service payments and hand back the keys to their lenders. According to Jones Lang LaSalle, metro Atlanta office vacancies reached 22% at the end of 2009, compared with the national vacancy rate of 18.3% over the same period.
While Atlanta may have caught the attention of Congress as the poster child for distress in commercial real estate, it may also symbolize a turning point for the national economy.
“While the markets still favor the tenants, there are signs of stabilization such as growth from the federal government, health care sector, energy and clean tech, and even portions of the technology sector nationally,” said Ben Breslau, director of research for Chicago-based brokerage Jones Lang LaSalle. “The recovery in the national economy has begun.”
Breslau’s remarks were made recently to an audience of 200 during a 60-minute breakfast program hosted by Jones Lang LaSalle at the InterContinental Hotel Buckhead. A panel of four, moderated by Breslau, discussed the most pressing issues that face the Atlanta and national commercial real estate markets, with a focus on the office sector.
Panelists included Tom Coakley, MetLife’s Atlanta regional director of real estate investments; Christopher Eachus, vice president and partner in the Atlanta office of Boca Raton-based Crocker Partners; Andrew Kauss, a partner at Atlanta-based law firm Kilpatrick Stockton; and David Tennery, principal of the office properties group of Atlanta-based Regent Partners.
Life companies are lending
Despite the large number of bank failures and the near complete absence of bank financing, Coakley stressed that MetLife, like other life insurers, is aggressively trying to make loans.
In 2009, MetLife completed $400 million in loans in Atlanta alone and about $4 billion across the country. Roughly half of the commercial real estate loans were refinancing, but the rest were “new money,” said Coakley.
“In 2010 we’re being even more aggressive,” Coakley added. “We’ve got about $6.5 billion of money to put out. We’re going to compete on any type of loan, any type of structure and we’re going to keep within our underwriting guidelines.”
While institutional investors are competing for prime assets and borrowers, the consensus of the panel was that property values have fallen so drastically across the nation that a majority of loans made at the height of the boom are underwater.
Resizing the debt
“There’s not a deal out there that’s been done in the last few years that is not going to have to be re-sized,” said Tennery of Regent Partners. “That’s just the reality of it.” Since 1988, Regent has acquired and developed more than 10 million sq. ft. of hotel, office, residential and retail properties valued in excess of $2 billion.
While the new regulatory changes in Washington have been helpful, at some point the commercial real estate industry will have to face the growing volume of CMBS and bank maturities, not just in 2010, but each year through 2015, noted Tennery.
“If you’ve got a property that’s [valued] above the debt level, then you’re probably in better shape than most in this environment, particularly in Atlanta,” he said. “In terms of the current environment, if you don’t have a good solid fundamental piece of real estate and don’t have the capital position to keep you out of trouble, you’re going to end up in the poor house fast.”
Throughout 2010, tenants will likely continue to benefit from falling rental rates in the office sector in Atlanta and across the nation. As rental rates continue to fall, distressed opportunities will eventually begin to shake loose for investors, according to the panel.
For the time being, however, investors are waiting to see if the billions of dollars of loan maturities in 2010 and 2011 burst a commercial real estate loan bubble, according to Jones Lang LaSalle. Investors also would like to see market fundamentals show sustained growth before voting with their feet.
Rather than a bursting bubble, Coakley of MetLife forecasts a slow leak, as debt is resized and distressed assets become absorbed by the marketplace. “It’s not over yet,” he warned. “There are a lot of maturities to face over the next couple of years, but no predicted explosion.”
Following the panel discussion, office investors, owners and landlords in the audience shared their reactions on the state of the industry:
Bill Hollett, consultant, Orlando-based Eola Capital:
“We’ve got to work through a lot of debt issues and ownership stability issues. With the traditional job growth Atlanta has experienced and is predicted to recapture, we should be in good shape by 2011, 2012.”
Joseph Oglesby, chief investment officer of acquisitions, Atlanta-based Wells Real Estate Funds:
“On the capital markets side, based on what I’m seeing [nationally], it has quickly become a bifurcated market. There is a lot of capital chasing after a relatively limited amount of core, leased office properties. I think in Atlanta there has not been much product, if any, change hands recently. It’s been pretty quiet, but Atlanta always comes back. There are some good companies here that will drive growth.”
Michael Holmes, vice president of acquisitions, Atlanta-based Parmenter Realty Partners:
“The big takeaway was optimism. I went to the panel last year, and it wasn’t nearly as optimistic as it was this year. While we all sense that maybe the bottom hasn’t come, we’re so much closer than we were. We’re not falling as fast or as far as we were last year, and so we’re all optimistic going into 2010.”