Bloodbath or buyer's market in Buckhead?

Bailey Webb

March 1, 2008

The vast majority of commercial real estate pros, especially developers and brokers, are the most optimistic people you'll ever meet. A hurricane's on the way? Hey, we need the rain, and it's good for our friends in the construction industry and creates development opportunities. A big tenant is leaving the building? That creates revenue opportunities for our leasing agents. They're wired to see the upside. CRE_Hardin

Buckhead's office market also elicits positive reaction from those leasing and developing properties, but privately, many of their peers will tell you, "Glad it's not me."

That's not to say the situation is entirely dire or a reason for hysteria. With 2.5 million square feet of office construction underway or announced and the majority of it speculative, there's bound to be softness, but as one of our broker friends says, "These guys aren't stupid."

Will some developers struggle to lease and stabilize their properties? It's highly likely. But a bloodbath where buildings sit empty for years and lenders take them back ... that would be an economic calamity unseen in Atlanta since Sherman's March to the sea. These developers and owners – the Cousins Properties, Tishman Speyers, Dukes, Pope & Lands and Regent Partners, among others, of the world – are too savvy and experienced to dig too deep a hole.

Still, this is Atlanta, where the philosophy is to overbuild, feel the short-term sting and rebound. Some will feel the sting more than others, especially owners who have to backfill vacant space as tenants play inter-market musical chairs and depart for newer properties.

One group is poised to benefit, though: tenants. If you're a tenant looking for Class-A office space over the next two years, you're the belle of the ball.

There will be blood

"A well-positioned tenant can create the perception that there's tremendous competition for their business," says Andy Lechter, executive VP in the Atlanta office of Studley, a tenant-representation concern. "It creates opportunity whether you move or stay. If you're a tenant, it's a great thing and a wonderful situation."

Three Class-A office buildings totaling approximately 1.5 million square feet are underway in Buckhead, and Crescent Resources and Ben Carter Properties have announced another 800,000 square feet in Crescent's Phipps Tower and Ben Carter's Buckhead Esplanade, which is part of the developer's Streets of Buckhead revitalization of the area's former bar district.

Crescent is telling brokers it plans to break ground in the first half of 2008, but had not at press time. All these properties are slated to deliver in 2009 and 2010, after the election and, developers hope, after the economy has settled. term_caption

Regent Partners' 3344 Peachtree mixed-use development delivers this spring and already counts real estate firms Jones Lang LaSalle and The Staubach Co. as tenants, as well as the law firm Littler Mendelson P.C.; consultancy Aubrey Daniels International; and Sony Ericsson. The building's 500,000 square feet of Class-A office space is 51 percent pre-leased and includes the Buckhead Club, which is moving from Atlanta Financial Center to across the street. Sources indicate the property is closing in on 75 percent pre-leased as it benefits from falling between last year's delivery of Cousins' Terminus 100, which is above 90 percent leased, and the remaining speculative properties that deliver in 2009 and 2010.

"For the next 12 months, things should continue to be good," says Jeff Bellamy, senior VP at Jones Lang LaSalle, which is leasing 3344 Peachtree along with Regent Partners. "There hasn't been any kind of bloodbath in Buckhead. Those [other] buildings will fare well. When all three come online at the same time, there may be a blip as far as closing some deals."

Still, Buckhead historically absorbs approximately 300,000 square feet of office space each year. Do the math: 2.5 million square feet under construction or announced equals better than a seven-year supply.

"For all of that to be leased, you're going to have to rewrite the history books," says John Heagy, VP of Hines, which owns Atlanta Financial Center with General Motors. "Unfortunately, [overbuilding] has gotten us in trouble in the past, and may get us in trouble in this submarket. Yes, there was some pent-up demand, but I think they've tapped it."

But the next three years may be historic for tenant rollover as well.

According to industry tracker CoStar Group, 42 percent of Atlanta's office leases roll over between 2009 and 2011. These tenants could stay in their current Buckhead locations but have sizable requirements. Tenants evaluating their options include Kaiser Permanente (approximately 200,000 square feet); Marsh (approximately 140,000 square feet); Wipro Technologies (100,000 square feet); Interpublic (approximately 100,000 square feet); as well as real estate financier TriMont, Turner Construction and Bear Stearns. Only Wipro is a new deal to the market, so if the others move, it's not necessarily a net positive for the overall market.

No country for old buildings

Buckhead's vintage Class-A office developments – the Monarch Centres, Atlanta Financial Centers and Piedmont Centers – may have the most to lose as tenants seek newer space to meet technology needs, burnish their image and improve efficiencies.

"It's not the new developments that are going to have challenging turns, but the buildings these tenants are leaving," says Bill Kilborn, senior VP of office brokerage at CB Richard Ellis. "I'm more concerned about the older buildings."

Of course, those older buildings won't give up tenants without a fight. First, they still offer quality office space at a significant discount to the new buildings, $5 or more per square foot in some cases. Atlanta Financial Center and Piedmont Center also have begun renovations and upgrades, with Atlanta Financial Center in final negotiations with an operator to replace the Buckhead Club, reopening the space later this year in time for holiday events.

AFC also is improving its curb appeal on Peachtree Street with streetscape improvements and first-floor redevelopment to add more street-level retail, Heagy says.

"We'll do the things we need to do to keep it competitive going forward," he adds.

Despite the residential sector's woes and what looks to be another sluggish election year, Atlanta's population – and job-growth engines aren't projected to stop any time soon. Ultimately, some developers and owners will struggle, but optimism rules the day even as landlords of existing properties duke it out with the shiny new office towers.

"Initially, people always ask, ‘What the hell are those guys doing?' " says Fred Sheats, senior VP and partner at brokerage Colliers Spectrum Cauble. "A few years later, they talk about how smart they are. People who bet on the future of Atlanta have always won. Those guys aren't stupid."