Our annual panel of experts says city's job and population growth fueling the need for new space
There's a joke making the rounds in Atlanta that goes something like this: What's the state bird of Georgia? Answer: The steel crane (with apologies to the brown thrasher). Cranes have become an accepted and expected part of the area's skyline, visible everywhere from Buckhead to Cobb County to Georgia 400. While the commercial real estate market is vigorous, new construction is outpacing absorption in the Southeast's largest city. Still, developoers say the space is needed to accommodate corporate relocations. With more than 5 million sq. ft. of office being built - most of it on a spec ulative basis - real estate watchers are keeping a close eye on Atlanta. A group of key Atlanta real estate players discussed the market during a meeting in March at the Ritz-Carlton in Buckhead.
NREI: (To Mike Elting): Give me an overview of the supply and demand situation right now for the Atlanta office market.
Elting: If it were that simple. Clearly, I think most people would agree, Atlanta has a whole lot of construction going on right now, but it's in selective markets. If you look at Atlanta, you've got to take it on a submarket-by-submarket basis. And you start at the heart, which is an issue and a problem, and downtown's a huge issue for everybody just because of the surplus space that a lot of it is small floor plates, buildings that are obsolete in some respects. So there are some real issues downtown. There just doesn't seem to be a whole lot of depth. But downtown's still important to us all. You hope that something happens with the Coca-Colas or something like that. Gail (Peeler) probably knows better than anybody what's going on downtown, but you just hear a lot of issues of not a whole lot of depth.
But then you jump just a little bit north of that, and you go to midtown, and it's (space) just flying off. So a building in midtown, where there is no construction and where Don's (Childress) been such a factor over the years, a building in midtown right now would do very well. So somebody like John Dewberry (Dewberry Capital Corp.) who's announced a building up there near WSB (TV), I think he's hearing from a lot of people that the demand is tremendous in midtown. At least for 200,000 or 300,000 sq. So, there's a market with no overbuilding and a lack of supply. All of those spaces that were available - you know the IBM sublet's gone down, and IBM Tower all that backfill, NationsBank building - no space at all.
Then you go to Buckhead and clearly, there's an issue of overbuilding. John's (Murphy) building has done so well, but it's the first one out. Is there the depth for Holder's building and for Piedmont Center and for Regent and for everybody else to fill all those quickly? That's got to be a question for everybody. John's out there hustling a building. John Bell and John Murphy, those are the two players now, but if you drive by Holder's site today and you see all the grading done and everything, and you say, "Are there enough users in Buckhead?" and I think that's a real serious question about the depth of Buckhead.
Go to the northwest, and it's getting into the same kind of thing - all the new construction. Yeah, there's a tendency to be overbuilt. Once again, Don's been so secure with how well Galleria's done and some of the other buildings, but if everybody comes up with a new product, yeah, we could be overbuilt very quickly in northwest. But to me it's the biggest sleeper market around. It's such a good location, proximity, it doesn't have the traffic issue at least right now.
Then you go to Central Perimeter, you know that's very everybody's having problems with traffic congestion and all that. You're going to have huge sublet spaces coming online. You know, couple that with some new construction, and there's a real question mark around Central Perimeter.
You go north to North Fulton, and it's done very well, and most of that is either build-to-suit properties or whatever, all the new announcements on properties. I mean, North Fulton has been a tremendous success story. So, right now, you wouldn't say it's overbuilt, but it's got a lot of new construction that's going to impact, probably the Central Perimeter as much as anybody. And it's a different story for every market, but clearly when we've got 5, almost 6 million, sq. ft. under construction, and with absorption not being that large a number, you've got a tendency to get overbuilt a little bit, but at the same time, Atlanta has the best employment growth; it has the best prospects of attracting new people like the GE Power Systems that Cousins did at Wildwood and we were fortunate enough to work on. So there's all those positive activities, too. And so all of it, and I'm a broker, but you want some of this. You want a little bit of balance; you want a little activity; you want opportunity. If John's building hadn't been empty, GE might not have moved to Atlanta. So you've got to have some of that to keep stimulating. Every market's different, but every market's important to all of us.
NREI (To Gail Peeler). Give us some of the dynamics about what's happening downtown. We know that Coke didn't buy Inforum, and you're trying to lease that fairly large building.
Peeler: There is a lot of space on the market. The powers of downtown are trying to shift the center of downtown. You've got my building (Inforum), where we're converting two more floors that were not used for office. You've got 101 (Marietta St.) with 650,000 sq. ft. that's opening in two months. And if they build that space over SunTrust (parking lot at Peachtree Center) there's even more.
NREI: Is downtown still a draw for a lot of different companies?
Peeler: Yeah, I think it is because there's large blocks of space. Even though you've got to pay for parking. Recently in the past few years there has been more reverse migration, as we call it. I think downtown's going to get lucky in the next year, and somebody from out of town is going to come and take a big block of space.
NREI: A major corporate relocation?
Peeler: Yes. People have a lot of choices to choose from downtown.
NREI: Is that where the biggest contiguous blocks of space are right now - still is downtown?
Peeler: I think so.
NREI: Let me talk a little bit about Buckhead then, since that's the really hot market. We've got a couple of REITs here, one sitting right next to me (John Murphy of Cousins). Let me talk about Pinnacle for a second, since last year we were talking about the success of Monarch Tower. Now we're going to start talking about, I guess, and maybe a couple of other projects. Tell me why Pinnacle's been fairly successful in leasing up. You had a previous requirement before you started?
Murphy: We had a prelease requirement we were working on with Merrill Lynch and A.T. Kearney. The irony of that prelease was that to meet Merrill Lynch's move-in date, we had to start construction by a certain date. And so we did take some risk that we don't normally do because we were still negotiating. We felt good about the lease, but it wasn't done. But if we had waited until the lease had been completed, then we would have missed the Merrill Lynch window. So we started out with Merrill Lynch and A.T. Kearney. And getting back to the core question, I think to a certain extent like Monarch II (Monarch Tower), there's a window. There's a window right now of investment banking firms, boutique money management firms, advertising firms and some law firms. It's not a deep market. It's a window. There's no question there's a window right now. With the one difference being with it, Gail, with your window (at Monarch Tower), you had no competition. I mean, there were no other buildings. [Now], there's Holder (Properties), there's Tower Place, and there's Piedmont Center (15). I think from the standpoint of The Pinnacle, and again, I'm biased, I think it's location, location, location. I mean, you're on Peachtree Street. I don't think there's any address in metropolitan Atlanta and in very few cities outside of Atlanta, like Peachtree and Lenox. I mean, it's a unique address. And basically, three of four corners are gone. Two malls and the Ritz-Carlton. So here you've got the fourth corner; it's unique the way the street at Peachtree and Lenox at that location, you know, pushes out. I mean, the building looks like it's hovering right over - it is hovering right over the street. So the dominant feature of the visibility of it has been a factor also. But without question, right now in the Buckhead market, there's a window, and I'm just glad we started when we did. Because it seems that - I think we've seen this even in other markets - companies that normally would look a year and a half to a year in advance they want to be in tomorrow. That's just amazing. It's amazing in Wildwood, at one point, how many deals we did that there was no way to do the lease and then do the construction. So we had side agreements. We were negotiating leases; we felt we had gotten passed the economic issues. We felt so comfortable about the deal, you know both parties did, that we had a side agreement [that] if this deal blows up, you owe us this, this and this. But if you want us to put you in on your deadline, we got to start now.
Ed Milton: On Buckhead, one thing you might examine is Lenox Park. You've got a new building going up at Lenox Park, and AT&T just took 500 jobs out of Lenox Park and moved them into Promenade (Two in midtown). So a real barometer of its health might be how they do in back-filling that. When [Cousins] took tenants and inked them in [Live Oak Two] from The Lenox Building there next to the JW Marriott, they back-filled pretty quickly, already, so that's helping. There's no secret why Buckhead attracts construction. It's got the highest rents and the lowest vacancy today, but clearly it's not a preleased market. It will be interesting to see what happens over the next 12 months what happens with other preleasing.
NREI: Let's talk about other preleasing since - John (Bell), you hiding over there? (Bell of Regent Partners is preleasing Tower Place 200 in Buckhead).
Bell: I agree with John (Murphy) that this market is not that deep a market, but in one since in the fact that there are not a lot of large tenants in the Buckhead market. But there are, hell, we did 250,000 sq. ft. in the existing Tower Place building in 1993 to 1994 with five to 10,000-square-foot tenants. I think there will be a lot of opportunity once you get your building along to go after tenants in that size range. The other thing that I'm encouraged about is we're seeing a lot of activity from tenants outside of Buckhead wanting to come back to Buckhead. One of the main reasons, I think, is Georgia 400 and the Buckhead Loop access, which I agree with John location, location, location, address, address, address. We're a Buckhead Loop development with a Peachtree address, and there's a real advantage to that. John's done a great job with his (Pinnacle) building, but we think there's plenty of room in the marketplace for our 260,000 sq. ft., and we're really encouraged by the activity.
NREI: David (Steinwedell), do you want to jump in here? Do you think there's room in the market for tenants out there, smaller tenants that are going to move into new blocks of space?
Steinwedell: It's interesting, what both Johns talked about with people with tenants working with short time frames. I think you're going to see that downtown as well, because people are not looking out 18 months any more; they want to move their 20,000 sq. ft. or 50,000 sq. ft. very quickly. And if you can't bring your building on line in their time frames, their going to have to look at alternatives of where to go. Do you go to Central Perimeter? Maybe not. Maybe you do go downtown where you do have competition of rates; you have competition of choice down there.
NREI: Let me get back to the tenants for just a second, and then we'll start talking about some of the other spec construction. Why are some of the tenants wanting to move so quickly? I mean, you can sort of tell me if this is a tenant's or a landlord's market, and is it shifting? Chuck (Moody), you've been in this market forever, what's happening out there?
Moody: I think it's still a landlord's market in respect that we're not seeing significant concessions within any marketplace. Most of these buildings are still getting the rental rates that they're pro formaed for. So, I wouldn't say that it's a tenant's marketplace yet, and it may not be for some time. In terms of why they're moving in so soon, I think it's just a function of the changing of their businesses. I think there's an underlying factor to the tenant demand that we might have missed. If you remember in the early years of the '90s, we went through significant downsizing in corporate America, and the result of that was, you've got not very efficient space in terms of utilization on a per-square-foot-per-employee basis. What they really were able to do was hire people to move them into existing parcels. After four or five years of exhausting that, all of a sudden, this space is pretty well jammed up. What I would suggest is that our absorption numbers for the early '90s, even into the mid-'90s, may not have been as real, simply - and I say real, I mean they were understated - because they had space to put employees in, where today that's over. So, there's great pent-up demand. I'm talking pent-up demand within the premises of the tenants, and I think that if you really want to look at that, our absorption numbers are 4 million, almost 4 million, 3.5 million, may have been significantly better had it not been for that downsizing period of five years. And I think because of that, we may be surprised at a continual level of absorption that may surprise a lot of the Jamisons and the prognosticators of future absorption. I think what I'm saying is that I think it's going to be better than what a lot of people think because of that.
Bo Jackson: I want to piggyback on that because I think that's a great point. One of the things I'm always frustrated with as a REIT is Wall Street discounting Atlanta because of overbuilding, but what it can't seem to get its hands around is Atlanta has great ...
NREI: Right. It's easy to see the supply; you go count the cranes.
Jackson: That's right. And then they get scared because you don't see those cranes all around the country except here. On the demand side, there are other points. In the first 60 days of this year, North Fulton did as much leasing activity as Jamison projected for the entire year - 950,000 sq. ft.. The numbers that they're going to announce in the next week or so are going to be way high. They're running about a million-four this year. OK. We have very high pent-up demand, and somebody's talking about having some product in the market, we need to have product in different locations because the demand side is going to surprise a lot of people.
NREI: Is it true corporate expansion into new space or is it sort of just a shuffling of the deck of existing players?
Jackson: Here's what's going to happen ... if you look at the labor market for the next five years, you're going to have a shortage of qualified employees.
NREI: Well, we have a shortage right now.
Jackson: You have it right now; you can't find the IT (information technology) people that you need. So, you're not going to put those people into cubicles; you're going to start putting them into the right space. So that's going to create the demand in our market.
Murphy: Chuck pointed out downsizing in the early '90s. There's an irony to it because I don't think any developer experienced downsizing like we did with IBM, our partner. Two things that we experienced: One, with all the publicity about the AT&Ts and IBMs downsizing, the story that should have been told was about the small-cap and mid-cap companies that were expanding - I mean, of normal expansion of new companies moving into the IBM space, I think, was a great story that never got told properly.
NREI: George (Edwards), jump in here at any time. What are seeing out in the marketplace for tenants. Do they feel it's a tenant's market if they see all this space out there? Or are they trying to move around?
Edwards: Well, I think, as Mike (Elting) said earlier, it varies from submarket to submarket, but I wouldn't agree that it's landlord's market. I don't think given the amount of space and choices out there. Certainly, it's not a tenant's market, but I think the market is getting a little bit of a balance.
NREI: At this point in time, but a month from now ...
Edwards: Well, I've heard some talk of the "F -word." Free rent. Not a lot. It's just now starting.
Quinn: If you look at the national numbers, I think we did $250 million in construction in the high times of the '80s; last year we did $100 million. So we're really not that far up from the trough of the '90s. One exception, look at Atlanta. We have 7.3 percent of our existing stock under development today. The second city is just over 4 percent. And I can count 20 cities - Minneapolis, Cleveland, St. Louis, Miami - that aren't even 2 percent. So, it's all relevant. We look like we have a lot going on, but I look back over, I've lived here for 19 years, Atlanta has always had a higher vacancy rate because we have to anticipate that growth. You couldn't get a tenant to relocate here unless you had a block of space. We are disappointed, we are despondent, when we've had less than 60,000 [new] jobs in a year.
Steinwedell: The advantage you have of being in Atlanta is you're looking at the future. Everyone looks at Atlanta and says, "Wow, you guys have a lot of construction going on." We hear about an overbuilt market. So, I think everybody's really worried the future.
NREI: Greg (Gregory) I want you to jump in here because I remember last year our conversation was turning to the industrial side and your competitors. I mean you've got some serious REIT competitors out in the marketplace. You know you're on the biggest industrial companies left that's private. You've probably considered coming a REIT. How is that impacting the industrial side?
Gregory: You know, we did consider becoming a REIT in the early '90s and decided not to, and there's not a month goes by that somebody doesn't call about being a REIT, but we chose not to. The thing I think is happening with the REITs and the money they do, they're now financing a lot of our competitors - small competitors. AMB (Property Corp., San Francisco) is, for example, as a fee developer. It's not as disciplined as it should be. We've seen the leases grow short term. That means too much capital's in the market. So I'd say that's the dynamics that we see going on, and we're concerned about it because the REITs are pushing a lot of money into the marketplace.
NREI: Don, do you want to jump in? You're doing some industrial properties also.
Childress: I think I really agree with Greg, particularly in the industrial business where the REITs are the take-out capital for a score of very small developers who really probably don't have the net worth to get a construction loan to build a $12-15 million office building, but they can do a $1-3 million industrial buildings, and then if they can have Security Capital or AMB or whomever come in and do that, I think that has been really a unique play that the REITs have done for the small developers that has not existed in the office market as well.
Gregory: One of the things that I think, the market doesn't believe that it really takes much expertise to be in industrial, that you can just go out there and build boxes.
Childress: Yeah, I started in that business. I think they think industrial people are not very smart, they don't need to be.
NREI: What's the balance right now for supply and demand for industrial? You folks are putting up some projects; Don's got a couple going.
Gregory: We think it's balanced right now; I don't know how much longer it's going to stay balanced. There's some ill-conceived buildings that are on the market that are empty. When you see money coming in financing people that couldn't do it otherwise, and they're going to be competition, whether you build a building that's a good building or not a good building, it's still going to be an alternative to the tenant. We've seen the terms of leases really shorten. You know, we used to do 10-year leases, five-year leases. Now we've got, the REITs are doing stuff like two-year leases, or a five-year lease with a two-year kick out. Wall Street doesn't look at the term of a lease. They don't know anything about it; the question never comes up. The thing that keeps coming up every time we talk to REITs or talk to Wall Street when they come see us is, you know, "We need a good story to tell," and that's what they're doing, they're telling a good story. The dangerous thing is that's fine, as long as they're telling that story to Wall Street, but if they start believing that story themselves, it's going to be dangerous.
Murphy: I think Greg's point about short-term leases and Wall Street is interesting. I think Wall Street looks at a short-term lease as, ah hah!, when that lease terminates, they have [opportunity to increase lease rates].
NREI: Whereas from a real estate perspective, it's totally different.
Murphy: We had this concern and attitude about long-term leases, and again, Wall Street kept saying, you know NationsBank lease, 20 years; Troutman Sanders, there's bumps in it, but 15 years; you know IBM lease, is 10. You know, you don't get that tremendous spike. Where is it?
NREI: Can national REITs prove that bigger always is better?
Childress: I don't think you can. I've sort of been there in my previous life, when I was at Trammell Crow. We were a national company, and in the golden years we had maybe the best collection in that 10 years of people who existed, but we simply got to be too big, and that's the reason I left. I think that Wall Street believes that inherently there are economies of size, and I would suggest to you there are diseconomies of operation in the real estate business. When everything's easy, you can get decisions made, but next time we have a little bit of a tough market, and y'all come in here and you're wanting to get leases done and then you're talking to the branch office of [Sam] Zell in XYZ City, trying to get a deal done, and then they've got to run it up the flagpole because their earnings aren't quite where they were - I think that is the easiest competitor you'll ever want to have, and I don't mean them specifically. Although I would say that as well or anybody that's that size. And I don't think that's a function of necessarily being a REIT. You can be a private company and be in 13 cities and have all your best people flying all the time but never there to deal with the people. I think those are easy picking as competitors. So, I may be really wrong on that, but I could not more fundamentally disagree with Zell and what he's doing, and he's a very smart guy, but I don't buy that strategy at all.
Altenbach: Well, it's textbook real estate. Real estate is a very local business, and when you get to the point of it's a national type of an outlook, I agree with you of Zell, I think he loses touch with the ability to have your hand on the pulse and know what's going on on a day-to-day basis.
Sharon Altenbach Vice President Richard Bowers & Co.
John Bell Leasing Representative Regent partners
J. Donald Childress Managing Partner Childress Klein Properties
George Edwards Senior Vice President Carter & Associates-ONCOR
Mike Elting Branch Manager Cushman & Wakefield of Ga.
Robert "Bo" Jackson Senior Vice President Colonial Properties Trust
Greg Gregory President Industrial Developments Int'l
Chuck Moody Vice President Goodman Segar Hogan Hoffler
John Murphy Senior Vice President Cousins Properties Inc.
Kieran Quinn President Column Financial
Ed Milton Executive Director CBC/KOLL
Gail Peeler Vice President of Leasing Compass Management & Leasing
David Steinwedell Senior Director Jones Lang Wootton
Eric Zimmerman Investment Sales Broker Ben Carter Properties
Ben Johnson Publisher National Real Estate Investor