During the mid- and late 1990s, the Southeast set the pace for the nation regarding commercial real estate development and investment. The boom was most evident in Atlanta, where technology, telecommunications and the area's traditional base of blue chip companies expanded over an extended period of time--from before the 1996 Summer Olympics through 2000.
Even in early 2001, the outlook for Atlanta's commercial real estate market was generally favorable. The office vacancy rate was a healthy 11.6 percent during the first quarter. Certainly, the stock market was in decline and dot-corn businesses were faltering. But some major companies such as WorldCom (now MCI) and Mirant were still in expansion mode, and investors remained eager to bankroll new office projects.
During 2001 and 2002, construction cranes were a frequent sight on Atlanta's ever-evolving skyline as speculative projects moved from concept to steel and glass reality. In early 2003, some three million square feet of new office properties were under construction in the Atlanta area. (See the sidebar on page 12 for a look at commercial real estate conditions elsewhere in the Southeast.)
"Phantom" vacancy haunts market
Many developers were counting on a continuation of Atlanta's strong job growth. In early 2001, however, the Atlanta job-creation machine suddenly cranked into reverse. According to the Bureau of Labor Statistics, after netting no fewer than 55,000 jobs each year between 1993 and 2000, Atlanta's payrolls grew by only 10,000 in 2001 and declined by 16,000 in 2002 (see the chart on page 12).
The result: Atlanta today is awash in vacant office space. For example, in 2002 Houston-based developer Hines completed One Overton Park, a 380,000-square-foot office tower built speculatively to accommodate an anticipated expansion of corporate tenants in northwest Atlanta. As of early 2003, One Overton Park is more than 80 percent empty. Even signature buildings such as One Atlantic Center in midtown Atlanta have large vacancies, and major new projects in the area such as Atlantic Station (6.5 million square feet of office space) and the 41-story Symphony Center are in early phases of development with pre-leased tenants.
As the office supply has increased, so has the vacancy rate in the Atlanta area, which has surged nearly 11 percentage points in two years to more than 22 percent as of the first quarter of 2003. Moreover, many real estate professionals believe that number is deceptively low given the undetermined amount of "phantom vacancy"--a large volume of subleased office space that has opened up as a result of corporate downsizing. If such phantom vacancies are factored in, the city's actual office vacancy rate is probably closer to 30 percent.
"I'm worried about Atlanta," said Raymond Torto, a principal with Torto Wheaton Research in Boston. "There has been a tremendous development spigot in recent years, and it's affected virtually all property types."
How out of balance is the supply of real estate in Atlanta? Even without considering the phantom subleased space, the market confronts some daunting arithmetic. Currently, some 25 million square feet of vacant space exists. The market needs to absorb 10 million square feet to get that number back to a healthy level of about 12 percent to 13 percent vacancy.
Assuming the most optimistic scenario--in which Atlanta's economy kicks into high gear later in 2003 and reports the same rate of job growth that it delivered during the late-1990 boom years--Torto projects the market will return to balance in about seven quarters, or sometime in 2005. If growth is slower--a prospect that Torto and others believe is more likely--the office vacancy rate could remain above 20 percent well beyond 2006.
Charlie Croker vs. Bernie Ebbers
Atlanta has an impressive track record of growth, and some signs are positive when looking ahead. …