Twists and Turns Of Recovery

Ask Atlanta's top commercial real estate veterans about the state of the local market and youll consistently hear something that sounds like this: We're slowly emerging from the very deep sleep of the past four years.

Indeed, the southern metro is posting clear improvements. Atlanta's office market witnessed positive absorption in the first quarter of 2012—the first time since the second quarter of 2011 and, before then, the second quarter of 2010. Meanwhile, Atlanta's industrial market saw 1.6 million square feet of absorption. And, of course, multifamily is the darling as developers rush to put 2,000 new rentals on the market this year as vacancy falls to 7.1%, according to Marcus & Millichap.

"The commercial real estate market in Atlanta is improving, albeit more slowly than many would like," says Michael Bull, president and founder of Bull Realty in Atlanta. "The market is still very fragmented; some sectors and submarkets are recovering much better than others."

Strong leasing activity in several Atlanta submarkets has supported this slow but seemingly steady recovery. According to Grubb & Ellis, Central Perimeter, Buckhead, Midtown, Northeast/1-85 inside 1-285 and Norcross/Peachtree Corners all had positive net absorption in the first quarter. Overall, the vacancy rate is still over 20% for the market. But the real story is investor demand for class A office towers.

"The year for Atlanta is proving to be one of increased demand for commercial office properties, as many of our so-called trophy towers' have gone to market," says Scott Taylor, president of Carter. "We're seeing an increased volume of high-quality office buildings on the market, and investors are building up their portfolios while they can still do so at prices that are a fraction of the cost compared to other markets."

Six trophy office buildings—located in the Buckhead, Midtown and Central Perimeter areas—are either on the market, under contract or have recently closed. TIAA-CREF put Concourse Corporate Center, a 2.1-million-squarefoot development, on the market in April. Two Alliance, a 30-story office tower in Buckhead, went to market in late March. And the 55-story Bank of America Plaza is expected to go up for sale soon.

"As we close the second quarter of 2012, core and core-plus office properties in Atlanta are being aggressively pursued by institutional investors," says Gary Lee, a managing director and principal with Cassidy Turley. "They are seeking low-risk investments in our market that provide a higher yield than similar assets in the gateway markets of Boston, New York, San Francisco and Washington, DC."

Lee points to a strong example: Prudential Real Estate Investors' recent purchase of the 20-story 10 Peachtree Pl. in Midtown for more than $61 million, or $236 per square foot. The cap rate for the sale was 7.1%.

Bull is seeing an overarching trend in the Atlanta market no matter the asset class: fully leased, quality properties are in high demand, with values and cap rates back to frothy pre-recession levels in many cases. The demand is most intense for stable apartments, he notes, then medical, industrial, office and retail properties, in that order. The standouts, he adds, are single-tenant net-leased properties. If a property has a long-term lease with a credit tenant, the market is very strong.

"The lack of new construction has helped to increase occupancy across all sectors in Atlanta," Bull says. "Retail vacancy has been holding steady at about 10% over the past year. Industrial has improved from a vacancy rate of 13.6% a year ago to its current 12.7%. The tenants' market we've had since 2009 in all sectors is adjusting to one of more equilibrium. Depending on the submarket, the incentives for tenants have decreased and landlords are seeing some rental rate growth."

In Bull's view, the office submarkets showing the most improvement are Midtown and Buckhead. The hot industrial properties are large big-box properties being leased for online product storage and delivery, he adds, and apartments are hot across Atlanta, with the closer-in and newer properties enjoying the most demand. Retail tenants are still slow to expand in Atlanta, with the strongest occupancy growth in the healthy malls and busy grocery-anchored shopping centers.

Bull sees a positive trend. "Since the beginning of 2012, we've seen an increase in tenant and buyer activity in these markets," he says. "Investors seeking higher returns are moving to markets like Atlanta and to less-than-class-A-quality assets. Since the beginning of the year, more tenants are feeling better about the economy and are more comfortable securing space. They feel if they made it through the recession, they're going to be okay and it's time to move forward."

Summey Orr, managing partner at Hartmon Simons, is keeping a close eye on Atlanta market trends as the environment regains its momentum. Although multifamily is the soup du jour for developers, the sentiment may be changing on the sales side.

"From the acquisition side, most people will tell you multifamily deals are hot," Orr says. "But you're now starting to hear the Yogi Berra-type comments about multifamily product—'It's so hot, nobody's buying it anymore."

Beyond multifamily, one emerging trend Orr notes is the creative re-use of existing spaces nobody would have tried 10 years ago. For example, he reports office users going into retail centers, governments taking what was previously more commercial space, and recreational users in industrial spaces.

For all the good news and the notable emerging trends in Atlanta, though, there are some admitted sore spots in the viewing field. Office and retail—two areas that are seeing pockets of increased activity— also continue to show weakness.

"There are still areas of Metro Atlanta where the loss of a couple of significant retailers at a specific center has caused a whole center to struggle, for no real reason other than the bad luck of having two or three unrelated retailers in that center go under at essentially the same time," Orr says. "Those situations take care of themselves over time, but if you're an unlucky landlord trying to fill three big boxes in one center, it can make for some long days."

According to M&M's latest Retail Research Market Overview, better availability of construction lending is moving the likes of Publix and Kroger to shift their focus from renovating and updating existing retail stores to opening new ones. Meanwhile, Walmart is taking advantage of Food Lion's exodus from the region to explore opening smaller marketplace grocery stores.

"We're seeing owners beginning to study the renovation and reconfiguring of several shopping malls," Kevin Cantley, president and CEO of Cooper Carry. "Some new single-tenant retail buildings are emerging as well. Many of the new apartment projects that are located in denser market areas include limited ground-floor retail."

And on the office front, trophy assets may be in demand but the sector still has its struggles. Grubb reports that the Downtown submarket continued its downward spiral with 68,471 square feet of negative absorption in the first quarter. The area hasn't posted positive absorption since the third quarter of 2010. But it's the class B assets that have Lee most concerned.

"Atlanta still has a large overhang of class B office assets that are overleveraged, and through the mid-second quarter, there's been a general sense that REO office properties are not being sold at market pricing, which would reset their basis," Lee says. "With that said, the sales pace of REO properties does appear to be improving, and I believe it will continue to improve throughout the remainder of this year."