Commercial Real Estate: Office Market Drags Through '08

The downturn that began in January continues its hemorrhage with the latest economic crisis.

Jarred Schenke

October 31, 2008

F or Frank Quatro, his latest lease is a sign of the times.

Quatro, who is a managing principal with the commercial real estate brokerage firm Newmark Knight Frank in Atlanta, represented Consumer Credit Counseling Services (CCCS) of Georgia in leasing 25,000 square feet at Interstate North, a suburban office park in the Cumberland-Galleria area of Atlanta.

"It's total net gain due to a total increase in their business in the last six months," Quatro says.

In an economic environment where many companies are contemplating consolidation instead of growth, the CCCS lease is an encouraging bright spot. Or maybe not. After all, CCCS' business success is built upon the failures of a debt-ridden consumer. And Quatro says it's not just credit counseling firms that are expanding, but a bevy of bankruptcy law firms, including Adam Goodman, a Chapter 13 trustee firm, which inked an early full-floor renewal at 260 Peachtree in Downtown to capture a lower rental rate.

Unfortunately, there's just not enough of these type of companies to help alleviate the hemorrhaging being experienced in Atlanta's office market in 2008. And it's a bleeding that only demonstrates signs of picking up velocity.

As of the third quarter of this year, companies have emptied more than 680,000 square feet of office space in the metropolitan area, according to preliminary data from Bethesda-based CoStar Group Inc., arguably the leader in commercial real estate analytics. The term used by commercial real estate officials is "negative absorption" to describe the phenomenon of more space being added to a market than leased by companies.

After adding in nearly 301,000 square feet of office space being offered by companies for sublease, Atlanta bled nearly one million square feet of office space during the third quarter of 2008 alone, according to CoStar. To put it another way, it's as though every single tenant in Atlanta's largest skyscraper, Bank of America Plaza, decided to move out and close their doors within a three-month period. "Sublease" is an industry term that reflects space no longer actively used by companies, but which is being offered to the general market for any company that wishes to pick up the lease, often at a discount. Sublease also is a sign that companies are attempting to reduce costs and headcounts at those locations.

These are statistics not seen since the early part of this decade, just after the technology sector crash and the terrorist attacks on 9/11 froze the business community in fear and uncertainty. Since late 2004, Atlanta's office landlords regularly saw an average of 1.1 million square feet of positive absorption per quarter. That abruptly ended at the beginning of the year. And the trend has only accelerated.

Ruled by fear
By the middle of 2008, the business climate in Atlanta - and the world, really - has been ruled by fear. And that has stalled major capital decisions by companies, including assessing real estate needs, some industry experts say.

"A lot of the larger corporate-type firms are in more of a state of caution, and are in a holding pattern," says Dan Granot, president of Dan Granot & Co. in Atlanta. He says this is forcing many companies to just renew their office leases instead of moving to another location or taking on additional space.

"There is probably less moving from point A to point B right now than we've seen in awhile," he says. That's certainly been the case with some of the larger prospects that were in the market during 2008, including the Intercontinental Exchange, which renewed 46,500 square feet at 2100 RiverEdge Parkway, according to Marcus & Millichap statistics.

Atlanta also has lost at least one major potential office relocation.  Robert Half Financial, one of the country's largest accounting firms, nixed Atlanta as a potential location for a major call center, one that would have encompassed more than 200,000 square feet, says Duncan Gibbs, the broker with Jones Lang LaSalle who was representing the company here.

"Unless there's a lease expiration staring users down the gun barrel," no one's making any decisions at this point, says Sam Holmes, vice chairman of CB Richard Ellis Group in Atlanta. "It's certainly a perfect storm right now with the credit crisis, the subprime [meltdown] and then an unprecedented federal bailout. When you have all the things that are going on, the last thing that companies want to do is make a long-term facilities decision."

Holmes, arguably one of the most prodigious commercial real estate brokers in Atlanta, says this economic crisis outstrips any that has faced the industry in a generation.

"It is the most challenging it's been in my 21-year career. Any business, when they're looking at credit, are having to put more equity into deals, and debt is more expensive," he says. "Obviously, the ramifications of that are extremely challenging. It's unfortunately affecting companies throughout the business spectrum."

Atlanta recession in making
Finding anyone in the business community today optimistic on growth prospects is challenging. And that is an ominous sign the metro area already may be embroiled in a recession.

"When it's all said and done, we'll decide this was a recession," says Dr. Roger Tutterow, professor of economics at Mercer University in Atlanta. "Obviously there's a lot of concern about unwinding the financial knot."

Tutterow says this anemic leasing environment is forcing landlords to up concessions at properties. But even with incentives like more dollars to companies to outfit their spaces, and extra dollars being offered to brokers who represent prospective tenants, Atlanta has at least two years of supply to work through before there's potentially any improvement, he says.

Richard Poland, an analyst with CoStar, says his group has been impressed with the metro area's resilience so far in face of mounting bad news. Negative absorption could have been much worse.
"We're still looking negative for the year," Poland says. "But to me it's not as bad as I was expecting, given the emotion and feel of the market."

But as to whether the credit crisis deepens; whether the economic stabilization act really works; and whether the decimation in the international financial services industry finally ends; could determine if Atlanta's office buildings become even more empty than they are now.

"There's so much going on out there, it's very hard for anybody to get a grasp," says David Hume, a broker with Marcus & Millichap in Atlanta. Now, with mounting geopolitical tensions with Russia, Iran, Pakistan and a national election, Hume says he believes "we'll be lucky to keep [the market] where it is."

"I'm a perpetual optimist, but everyone has to look at the history taking place right now. There are going to be changes, and not all of them are going to be positive," says Gibbs. "There will be an impact, but what the magnitude of that impact will be, remains to be seen."

Related Content:

• In 10th straight quarter of positive absorption, urban corridor solidly outperforms suburbs
• BTB Exclusive - Home ownership among Georgia's Asian Pacific Community
• Commercial Real Estate: Vital Signs

---