“Be Zen in Ten” should be the motto of the commercial real estate industry throughout 2010 as it comes to grips with the reality of the deepest recession since the 1930s that has seen an estimated 8.4 million jobs disappear from the economy. The impact of those job losses on office and industrial space in Georgia and across the country has been substantial, with vacancy rates at record highs, rents depressed, significant negative absorption rates and virtually no new commercial construction starts. Nationally, commercial property values have fallen more than 40 percent in the past three years.
Although initial reports show that the GDP grew at a 5.7 percent annual rate during the fourth quarter of 2009 — the best performance since 2003 — it is unlikely that those numbers will be repeated in the near future. Approximately 3.5 percent of the GDP growth resulted from inventory restocking orders, as companies that held back during the recession rebuilt their reserves. Unless demand for manufactured goods increases, the boost will be a one-time occurrence and growth will remain sluggish. Mark Zandi, an economist with Moody’s Investor Services, says that the federal stimulus added approximately 2 percentage points to fourth quarter growth. That will fall to below 1 percentage point by the middle of 2010.
Realpoint Research reveals that Georgia has 178 commercial loans, valued at approximately $1.3 billion, in distress. This represents 3.45 percent of CMBS delinquencies and 6.5 percent of Georgia’s CMBS exposure. Atlanta — the Southeast’s largest city — accounted for 151 of those delinquencies, representing 3.07 percent of CMBS. Although fourth quarter economic indicators were turning positive in Atlanta, the 142 million-square-foot office market is lagging significantly behind the economy as a whole. Absorption during 2009 was a negative 2 million square feet, spurred partly by the delivery of nearly 1 million square feet in Buckhead toward the end of the year. At the end of 2009, Atlanta reported an office vacancy rate of 21.6 percent; that is expected to rise to 22 percent with the completion of two Class A buildings, 3630 Peachtree Road and the Phipps Tower, during the first quarter of 2010.
Consolidations and business closures impacted demand for warehouse space in the 592 million-square-foot Atlanta market in the fourth quarter, according to Grubb & Ellis research. Throughout 2009, net occupancy losses climbed by 11 million square feet, with 84 million square feet of industrial space standing empty at year’s end. The industrial vacancy rate for Atlanta is 14.3 percent. Optimists expect some positive absorption to take place toward the end of 2010, thanks to Atlanta’s low operating costs, strong ties to the global economy and excellent transportation infrastructure. New construction will be strictly build-to-suit until excess space is absorbed and access to credit is more readily available.
“Investment activity is likely to remain slow in Atlanta until market fundamentals show sustained growth and confidence returns to the commercial real estate market and overall economy,” according to Lanie Rea, research manager of Jones Lang LaSalle in Atlanta. “So while the commercial real estate market may have bottomed in urban Atlanta, all indications point to a slow and cautious ride back to the top.”
Although some buyers have returned to the market, metro Atlanta's commercial real estate industry is likely to remain troubled for at least 3 more years, according to economists and real estate experts. For the 12 months ending December 31, commercial property sales in metro Atlanta fell 84 percent over the previous year. Sales totaled $1.6 billion, a sharp drop when compared with the $9.9 billion reported for the same period in 2008. Many properties are on the market, with some sellers offering to lend buyers financing on very attractive terms. Real estate is lagging the economic recovery as record vacancy rates and rental rates continue to fall. Significant job recovery is necessary to restart demand for office and industrial space.
Commercial users will enjoy a good year amid a continuing glut of office space. Landlord concessions, such as free rent and money to fund renovations, are on the table. Some landlords are even offering to take over a tenant's current space and sublet it. These enticements have prompted some businesses, such as law firms that previously occupied space in less expensive office buildings, to relocate to high-end trophy properties. Despite the vacancy rates, Atlanta remains high on corporations’ short lists as a relocation destination.
Looking to the future, one bright spot is Atlanta’s demographics, which show the state among the leaders nationwide in attracting population growth. In 2008, Georgia attracted 37,559 new households, making it the second highest growth state in the nation after Texas. This will drive retail and housing and will ultimately bode well for the state’s long-term prospects.
— Todd Yates is senior vice president of national development and general manager of The Alter Group's southeast regional office. James I. Clark, III, is a principal with the company's asset recovery division.