The Wall Street Journal-20080123-Blueprints - Atlanta
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Blueprints / Atlanta
Investor Anxiety Grows Amid Building Boom
Atlanta's perpetual building boom could be unnerving some commercial real-estate investors already jittery about the prospects of a recession and the credit crunch.
The region was among the top five of 54 markets in the amount of retail, apartment, office and warehouse space completed in the 12 months ended Sept. 30, according to Property & Portfolio Research Inc., a Boston real-estate research firm. While the pipeline is likely to thin if the economy softens, Atlanta is expected to continue ranking among the top five through 2012.
At the same time, rents and building prices remain below national averages, while vacancy rates also are among the nation's highest. Demand may slow if there is a recession. "Chronically overdeveloped, Atlanta can't get relief from building fever," states the Emerging Trends in Real Estate Report 2008, which was jointly produced by the Urban Land Institute and PricewaterhouseCoopers.
The economic powerhouse of the Southeast, Atlanta builds in part to keep up with its growth rate. Since 2002, the metropolitan area's population has grown at more than double the average annual national rate to about 5.3 million people. Nonfarm job growth also has outpaced the nation, according to Moody's Economy.com. In recent years, demand has outstripped supply, or been nearly in line, in the office sector.
But the area's lack of geographic boundaries, such as the ocean or mountains, puts fewer limitations on developers, and lately some of the office projects are speculative, meaning they are being built without some tenants in hand.
Susan M. Smith, manager in PricewaterhouseCoopers's real-estate business advisory services group, said it also is important to note that there are many submarkets and opportunities in Atlanta. But the new supply, which competes with older buildings and can ultimately weaken pricing power, remains a concern. "It's a red flag for investors," Ms. Smith said.
There already is evidence Atlanta's commercial building sales may be feeling more pain than other markets as many investors jumped to the sidelines after the credit market unraveled this summer. The combined volume of fourth-quarter sales of office, retail, apartment and warehouse properties valued at $5 million or more fell 41% from the year-earlier quarter to $2.3 billion, compared with a 30% drop nationally, according to Real Capital Analytics, a New York research firm. Dan Fasulo, managing director at Real Capital, said Atlanta may be losing out on a "flight to quality" as investors refocus on prime markets such as New York and California that don't have oversupply concerns like Atlanta, Dallas or Phoenix.
In a ranking of 15 major metropolitan areas by about 600 real-estate professionals, Atlanta's office sector garnered the largest percentage of "hold" or "sell" recommendations, according to the Emerging Trends report. The region's retail and warehouse sectors garnered the second highest, and the apartment sector got the third highest. The hotel sector was viewed more favorably, standing in the middle of the pack with the eighth-highest percentage of "buy" ratings.
