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ATLANTA With construction at a near standstill, area developers wait for the end of recession

Atlanta's real estate market in 1991 will continue to be a mixed bag. Construction will remain at all-time low levels in various sectors, particularly commercial office and retail, yet a tightening of space (especially large, contiguous blocks) eventually will result in a supply-to-demand ratio finally favoring the developer. Getting to that point, however, is a long road still to be traveled.

Despite the impressive victory by U.S.-led Allies in the Gulf War, Atlanta still must weather the current recession. During the latter half of the 1980s, the city withstood significant layoffs, mainly in manufacturing and construction. The latest cuts, however, have hit at Atlanta's heart - the service and transportation sectors.

Georgia State University's professor of economics and director of economic forecasting Donald Ratajczak says Atlanta will suffer its first year of job loss since 1974, which can be directly attributed to the shutdown of Eastern Airlines and related businesses. Eastern's demise cost more than 10,000 jobs in Atlanta alone. Ratajczak predicts Atlanta will lose 5,800 jobs this year before expanding by a sluggish 18,000 jobs in 1992. Unemployment here will exceed 6.5% in 1992 while population gains will slow to only 1.2% by next year.

As confirmation of a slower economy, the Atlanta Chamber of Commerce reported it attracted 129 businesses to the area last year, down from the 150 companies that located to Atlanta in 1989. The Chamber worked with 1,022 prospects in 1990, a 15% decrease from 1989.

Adding to the bad news was the city's drop in ranking of the best cities in which to locate a business, as recorded by New York-based Cushman & Wakefield Inc. Atlanta dropped from its No. 1 ranking to No. 6 as the best city in which to locate a business and from No. 1 to No. 4 in terms of the best place to locate manufacturing, warehouse or distribution facilities.

Lending practices, also, have taken a toll on Atlanta, with local investment trends indicative of what is happening nationwide. Many banks have reverted to policies that are almost too extreme in their implementation and pay no regard to the quality of the underlying security, the credit of the borrower and the status of the asset, says a 1991 property report by the Yarmouth Group, a real estate investment advisory firm. Although investment activity in the United States decreased significantly, the Yarmouth Group foresees the situation reversing for European investors this year.

Atlanta-based commercial real estate firm Carter & Associates validates this prediction, noting most new office construction in Atlanta has been financed by foreign or other non-conventional sources.

Real estate economist and editor/ publisher of Real Estate Perspectives Michael Sumichrast says consideration by the Office of the Comptroller of the Currency (which regulates 4,200 nationally chartered banks) to give banks more flexibility could encourage banks to work with borrowers to restructure real estate loans gone bad.

Yet, along with a number of problems besetting the industry, light at the end of the tunnel will entice developers positioned for the long term to hang on. As a regional center, Atlanta will be attractive for those companies consolidating several offices into one center.

Ed Milton, senior vice president and regional manager of Rubloff Inc., notes the stimuli to recovery will be industry, limited to about 100 companies. "This is not a recession where the consumer drives recovery; American business will," he says. Where Atlanta benefits, Milton adds, is through companies consolidating. "That's already in motion. There is a decentralization of decision-making to regional offices."

Also, developers no longer are required to "give away the farm" in trying to secure tenants to their buildings. "We're seeing more and more that free rent is not an issue for publicly held companies," says Ed Barber, senior vice president and regional manager of The Staubach Co. "We're telling prospective landlords to propose (a deal) aggressively so they won't be penalized on how they propose. We want them to have as much flexibility so they can give the tenant the best overall deal."

Barber notes there are "a surprising number of large transactions existing, at least five office transactions in excess of 100,000 sq. ft. in process." He adds two potential deals are companies considering relocating to Atlanta.

In the commercial office sector, 1.8 million sq. ft. of construction is planned this year, but Carter & Associates predicts just more than half that figure, 1 million sq. ft., actually will start construction. By comparison, Carter & Associates' year-end report notes that in 1990, almost 9.6 million sq. ft. of space had been planned over the course of two years. In 1990, construction of only 2.8 million sq. ft. of space was begun. Together with the 1.8 million sq. ft. anticipated for this year, construction still falls 5 million sq. ft. short of that 9.6 million sq. ft. planned. Net absorption of space in 1991 is not expected to exceed 1990 levels and will be in the 2.7 million sq. ft. to 2.8 million sq. ft. range. The biggest loser will be Class-B space.

Industrial absorption declines

Second-generation space also is a concern for service centers, according to CB Commercial broker Greg Haynes. More than 70% of the 5.5 million sq. ft. of available space is second-generation, he says, and the ability to market that space will separate the winners from the losers. In an informal poll of businesspeople involved in this segment of real estate, Haynes found that more than half experienced a decline in net absorption of their projects with more concessions being made last year than in 1989. Almost all those polled do not plan construction this year and 41% were pessimistic about prospects for the next couple of years.

New construction of business park space was virtually non-existent, according to the Carter Report. Only three projects totaling 140,800 sq. ft. were added to the market during the second half of 1990. Rental rates have hovered between $9.22 and $9.29 per sq. ft. for the last three years, but the last reporting period showed a decrease to $9.08 per sq. ft., which Carter & Associates attributes to Class-B space.

Much of what is happening in other sectors mirrors trends in the industrial real estate market. While still a key component of commercial development, industrial building activity has decreased nationwide, according to Sumichrast. Last year in the metro Atlanta area, just more than 1 million sq. ft. of new space was constructed, less than half the 3 million-plus sq. ft. of space constructed in 1989.

As with business parks, second-generation space (some of it obsolete) dominates this sector, says Charlie King of King Industrial Realty. Only 18% of the available space is new. Tenant options virtually are limited to second-generation space or build-to-suit space, the real benefactor in today's industrial sector. "Sometimes you have to fall off a cliff, but eventually, you get back out," King says of Atlanta real estate, noting the metro area has an overall vacancy rate of 17.2%.

Cushman & Wakefield reports slightly more than 1.5 million sq. ft. of industrial construction activity; overall, rental rates range from $1.50 to $12 per sq. ft. The firm notes that the Interstate 85 area and Gwinnett 316, becoming known as the Golden Triangle, continues to dominate activity for high-tech and distribution users, although the north central, northwest and southside have attracted many build-to-suit deals.

Multifamily oversupply decreasing

In multifamily housing development, building permits continue to remain low. Ron Terwilliger, chief executive officer of Trammell Crow Residential, expects the existing oversupply of multifamily units to decrease noticeably in the next two years as financing for new projects becomes increasingly difficult to secure. "Apartment markets in most cities are reasonably close to supply/demand equilibrium due to reduced construction activity following the 1986 Tax Reform Act," Terwilliger says. This year, vacancy rates nationally hovered around 9%, but Terwilliger says rates should fall to around 5% by 1995. Trammell Crow Residential should regain momentum in new apartment development by 1992.

Rob Johnston, president of Sovereign/ Southeastern, which manages more than 6.2 million sq. ft. of multifamily housing in Georgia, also is optimistic about the future of this sector. "We've been through the toughest times here in 1989 and 1990 that we've experienced since 1975," he notes, adding Atlanta now is at the bottom of the trough. "Within the next 18 months, we'll be seeing the start of construction on Olympics-related sports facilities and housing. Because the Olympics will bring 85,000 new jobs to the area, immediate housing will be needed."