Drive down Interstate 85 into the heart of Atlanta and rising over the freeway you'll see not only the largest construction site in the Southeast, but what many hope will be the future of development in the South's quintessential boomtown.
It's called Atlantic Station, a $2 billion, 138-acre mini-city in progress that, when fully developed over the next several years, will include more than a dozen office buildings, a convention hotel, more than 1,000 residences and in excess of 1 million sq. ft. of retail space — not to mention the second largest parking deck in the country.
Atlantic Station, as it looms over the city's main highway, is the largest and best evidence yet that after years of suburban sprawl, Atlanta may be ready for something new: mixed-use, village-style developments closer to the city — or to use a popular term that's not in the dictionary, “walkability.”
“That's what mixed use is really all about, the ability to walk to shopping and restaurants, and possibly work,” says Joel Brockman, development director at Lane Co., which is building multifamily units at several mixed-use sites around Atlanta.
A real awakening
Real estate leaders like Brockman are seeing a pronounced shift in both demographics and consumer acceptance of such projects in the metro Atlanta area, a shift that's driving significant changes in the way the city develops.
Metro Atlantans increasingly are balking at the hour-long commutes to work that suburban life has come to demand, says Egbert Perry, CEO of The Integral Group, part of a team of developers working to redevelop a 1926 Sears building near the central business district.
“We're getting smarter, and we're getting more desperate,” Perry says. “It gets nerve-wracking spending all your time on the interstate … To have a place to live closer to where you want to be is a much better quality-of-life decision.”
There's an “unbelievable awakening” of people deciding to move back into vibrant urban centers, echoes Hal Barry, chairman of Barry Real Estate Cos. Barry is building a 1.1 million sq. ft. mixed-use project anchored by office tenants Ernst & Young and Southern Co. in Atlanta's CBD.
This sea change in the way metro Atlantans think has forced multifamily developers and financial institutions to change their notions of development, observers say. And these trends have led to a bumper crop of mixed-use projects throughout the metro area.
In the city, available ground for new projects is limited. Consequently, the concept is spreading to areas beyond the Atlanta city limits, particularly where there's a cluster of corporate employers. “I see huge opportunity in the suburbs that are not too far flung, where the majority of jobs and people are,” says Brian Leary, vice president of design and development at Atlantic Station.
The population of Atlanta's CBD sprouted by 24% between 1990 and 2000, according to Central Atlanta Progress, a local business group supporting downtown growth. There are now about 25,000 people living in the city center. What's more, Central Atlanta Progress estimates that more than 7,000 new housing units will be delivered by 2007.
Many urban dwellers are young professionals who want to own a home rather than rent. Statistics show that home ownership is on the rise locally. According to the U.S. Census Bureau, 68% of Atlantans owned their own home in 2004, up from 61% in 1990.
Young consumers typically want to live close to their offices and their favorite restaurant districts. “It's very much a part of the ‘Seinfeld’ generation,” says Trent Germano, executive vice president for development at local developer Carter. Carter is building Lindbergh City Center, a mixed-use project on the city's MARTA, or subway, line. “TV viewers have come to think that it's neat to go downstairs and get a cup of coffee.”
Their parents may be on the move, too. Census data projects most newcomers to Atlanta in the decades to come will be older, over age 50. Many developers already are seeing the first wave of “empty nesters” who, now that the kids are grown, want to sell their homes and buy a low-maintenance condo closer to the city.
“It's clearly a demographic shift … Atlanta is changing and evolving,” Germano says. “Look back 15 years ago, there was no drive to live downtown or in Midtown. Today that's where the largest percentage of residential growth is occurring.”
Mixed use in Atlanta is hardly new. Colony Square, developed in 1972 and located on Peachtree Street across from the city's arts center, includes two office towers, a retail mall, 266 condominiums and a 467-room hotel.
Projects like Colony Square are enjoying a rebirth. In fact, the market has turned enough that nearly every new Atlanta project is calling itself “mixed use.” Many of the these projects trying to tap into the changing demographics in the metro area are offering a village-style concept where many uses are roped together, often near transit, where there are street amenities and life after 5 p.m.
City inside the city
The largest and most famous mixed-use project is Atlantic Station, a city within a city built on an old steel mill near Atlanta's CBD. What was once a brownfield marooned in an aging industrial district — cut off from the rest of the city by Interstates 75 and 85 — is today a gigantic hub of construction and activity.
A state-built bridge, known locally for its bright yellow paint job, has reconnected the site with the city's Midtown business and cultural neighborhood. AIG Global Real Estate Investment Corp., part of insurance giant AIG, is the project's financial backer.
AIG took interest in the project because Atlantic Station is built on a brownfield site, says John Whitaker, Atlantic Station's CEO and AIG's point man in Atlanta. The insurance giant had experience as an insurer with environmentally challenged sites, and recognized that the Atlantic Station project was an opportunity to marry that expertise with its real estate division, Whitaker says.
The original plan was for the developers to buy the land, clean up the site, put in the infrastructure and then sell parcels off to development partners for retail, office and residential. But the economy changed over time, Whitaker says, and the original partners never stepped forward.
In the end, Lane Co. took on the multifamily piece, while ventures of Jacoby Development, the project's founder, and AIG took over the rest. The project was unveiled in 2001, at an International Council of Shopping Centers show.
“Large projects always take longer and cost more than you expect,” Whitaker says. “You have to be patient and wily as you go through the development process. The development team here has come a long way. As we get closer to opening [the retail village] in October, it will be a grand achievement for everybody.”
Demand for each of the various components has been solid, which Whitaker says is because they're contained in one project. “The mix of uses benefits each project and makes each component more valuable,” he says. “I look at the opportunity for us to build more buildings, and having the retail at the feet of those office buildings is unlike any environment in the city. The synergies among the components create greater value for each component vs. stand-alone.”
Atlantic Station's first 22-story, 510,000 sq. ft. office tower, with SouthTrust Corp. (which merged with Wachovia in 2004) as a primary tenant, opened a year ago and is now nearly full. And there are sites for a dozen more office buildings.
The project's 811,000 sq. ft. retail town square, anchored by department store Dillard, Regal Cinema and stores like Gap will have a grand opening in October. IKEA, the European home furnishings retailer, will open a 366,000 sq. ft. location there in June.
Lane Co. is building its residential village, which will include more than 1,600 multifamily units, both apartments and condominiums. Atlantic Station even has mixed use within mixed use. Developers Novare Group and Wood Partners have teamed up to build Twelve, a 26-story tower on Atlantic Station's main drag with 404 condominiums and 101 hotel rooms. Twelve is set to open this fall.
Although project backers acknowledge that Atlantic Station has had an admittedly slow start and encountered a lot of obstacles along the way, Brian Leary, vice president of design and development, is giddy as the project nears its grand opening. “I'm really amazed,” he says, particularly at the residential component. “We had a feeling that if we built it they would come, and that people were tired of hour commutes and they wanted a place to live in town,” he says. “But demand has well outpaced what we ever thought.”
Follow the leader
Now others are getting into the mixed-use game. Local developer Barry Real Estate Cos. is building a $300 million office, residential and hotel complex in Atlanta's CBD. Allen Plaza, named for the city's mayor during the civil rights movement, will feature three office buildings — two are under construction — and a boutique hotel tower with about 100 condos. Novare and Wood Partners are building 1,100 for-sale multifamily units in two towers on a site next door.
In Sandy Springs, a suburb just north of the city near Interstate 285, The Sembler Co. last year took a wrecking ball to two old BellSouth Corp. office buildings to build Perimeter Place, a $165 million project on 42 acres with a 500,000 sq. ft. retail mall, 330 apartments and a 27-story condominium tower with 220 units.
Just a few blocks from Atlanta's CBD, a partnership of area developers won a bidding process to redevelop a 2 million sq. ft. former Sears store now owned and occupied by the city of Atlanta. Ponce Park LLC, which includes Lane Co., Integral and other partners, wants to turn the building into a $400 million village of 1,300 homes, 250,000 sq. ft. of retail and 100,000 sq. ft. of offices.
Underlying all this development is the notion that consumers want something else, a shift that has brought retailers, office developers and their lenders along, sometimes slowly, to mixed use.
It comes down to a different value system among consumers, explains Larry Gellerstedt, CEO of multifamily development and consulting firm The Gellerstedt Group. His company is building several urban condo units, including one in a partnership with office developer Cousins Properties.
“More people are valuing their quality of life,” Gellerstedt says. “They are waiting to have kids, they want to walk to work … and when they do have kids they're saying, ‘I want to spend time with my kids rather than deal with a 45-minute commute.’”
Office developers and their users have come to like the buzz and traffic associated with village developments, says Germano, Carter's executive vice president. Carter, which built a mixed-use headquarters for BellSouth Corp., does office leasing for Atlantic Station.
Carter will relocate its own offices to two floors, or 50,000 sq. ft., in the Atlantic Station office building, 171 17th St. this year. “It doesn't get [landlords] a better lease rate, but developers want to be in a place that's not an island,” Germano says.
Misconceptions put to rest
Retailers throughout the 1990s were resistant to the idea of mixed use, particularly at some early Sembler retail projects near Atlanta's CBD, recalls Jeff Fuqua, president of the development division at Sembler. “Many didn't think residents would live in a heavy retail environment.” And big retailers were nervous about locating in urban areas. “Either they didn't have a prototype store, or someone sitting in California didn't think that this was their market, or the project didn't have enough parking,” adds Fuqua.
But that was before the advent and success of lifestyle centers such as Cousins Properties' Avenue lifestyle centers. Cousins has built half a dozen Avenue retail centers, open-air malls with retailers such as Abercrombie & Fitch and Pottery Barn, in Florida, Georgia, California and Tennessee. Metro Atlanta has three such centers, all built since 1999, and Cousins has plans for a fourth.
The success of those sites, and others like them, changed thinking in the industry and helped convince retailers about the merits of mixed use, including Atlantic Station, says Leary, the project's vice president.
Today, “retailers don't mind having an extra 500 nearby residents passing by their site every day, and they like to be part of interesting, high-profile projects,” Fuqua said. “It's still not for everybody, but most of the better retailers understand” the benefits of mixed use.
Financing lessons learned
Lending institutions were also slow to accept the concept. Many lenders and developers still lack expertise in underwriting mixed use, says Harold Dawson Jr., president of Atlanta developer Harold A. Dawson Co.
Historically, lenders are shy of new concepts. “Equity wants at least some return,” Dawson says. “A construction lender wants to know if there are buyers for the project out there, or permanent lenders.”
Atlantic Station approached every major financial institution in Atlanta, but with little success, Leary recalls. Birmingham, Ala.'s SouthTrust Corp. eventually backed the project, and later financial giant AIG. “It was not an easy sell with the lending community, which is used to doing it a certain way,” Leary says. “They're very good at putting things in a box: retail, office, multifamily.”
And to keep it simple, some developments, including Atlantic Station, are financing each component separately, using a residential lender for multifamily, an office lender for the office suites, and yet another lender for a hotel.
“Don't try to do it as a boutique, crafted loan,” Leary advises. “It will give you brain damage.”
Lenders are getting the idea that each component makes the project work, Dawson says. “The financial side finally understands that the end consumer wants it, and demands it.”
The average college graduate, who used to wait 10 years before buying a home, is buying two to five years after leaving the nest, according to Post Properties. That shift led the locally based apartment REIT to enter the for-sale market last year.
This phenomenon is buoyed in part by low interest rates, which have enabled many young renters to buy their own homes, in many cases condominiums in hip areas close to the restaurants and amenities they enjoy.
“But there's more about this trend toward ownership than interest rates,” says Jim Borders, president of Novare Group. “Baby Boomers believed in home ownership and made big money being homeowners. They are telling their kids to buy as soon as possible.”
In fact, many of Novare's young buyers come to the sales office with their parents, Borders says. And many developers are zeroing in on the parents, too.
“There are people of all ages without children who want to enjoy the urban lifestyle, including empty-nesters,” says Mark Riley, founder and managing partner of Urban Realty Partners, which has several condominium projects in the pipeline around the city.
“These people want a second home in the mountains and a condo in town,” Riley says. “They don't want a home in the suburbs.”
Walter Woods is a reporter for the Atlanta-Journal Constitution
Atlanta - BY THE NUMBERS
POPULATION OF METRO AREA: 4.7 million
UNEMPLOYMENT RATE: 4.3%
Source: Georgia State University, Metro Atlanta Chamber of Commerce
Delta Air Lines
Gwinnett County Public Schools
Source: Metro Atlanta Chamber of Commerce
METRO AREA STATS
Office: Class-A 24% vacancy, 4Q 2003 20.6% vacancy, 4Q 2004
Rent per sq. ft.: $20.80
Source: CoStar Group
Multifamily: 11% vacancy, 4Q 2004 10% vacancy, 4Q 2005*
Average Rent: $806*
Source: Marcus & Millichap
Retail: 9.5% vacancy, 4Q 2004 9.4% vacancy, 4Q 2005*
Rent per sq. ft.: $16.93*
Source: Marcus & Millichap
Flex-Industrial: 14.1% vacancy, 4Q 2003 12.8% vacancy, 4Q 2004
Rent per sq. ft.: $3.60
Source: CoStar Group, Cushman & Wakefield
Hotel: 56.8% occupancy, 4Q 2003 59.5% occupancy, 4Q 2004
Average daily rate: $78.33
Source: PKF Consulting
ATLANTA REAL ESTATE SECTOR HIGHLIGHTS
Allen Plaza, a $300 million mixed-use center in the CBD includes the following: 30 Allen Plaza, a 265,000 sq. ft. building to be anchored by Southern Co., set to open in late 2005; 55 Allen Plaza, a 260,000 sq. ft. office to be occupied by Ernst & Young, set to open in 2007.
Grove Street Partners, a venture of Post founder John Williams, paid $10 million for a Buckhead site in August. Grove Street plans a 33-story, mixed-use tower with 170,000 sq. ft. of hotel rooms below 125,000 sq. ft. of condominium units.
Atlantic Station's 810,000 sq. ft. retail and entertainment village, anchored by a Regal Cinema and a 225,000 sq. ft. Dillard, will open in October. The region's first IKEA location will open on the 138-acre Atlantic Station site in June.
Lane Co. is building 303 loft condo units called ATL Lofts on the upper levels of six buildings in Atlantic Station's retail district, space once designated for offices. Lane's addition will cost $71 million and open in 2006.
Duke Realty Corp. announced in April 2004 that household products maker Clorox plans to open a 608,000 sq. ft. facility at Duke's Camp Creek Trade Center near Hartsfield-Jackson Atlanta International Airport.
Source: Company data