Atlanta Awash in Empty Offices Struggles to Recover From Binge

Andy McCartney VP of Client Services at Mansell Group
Andy McCartney, vice president of client services for Mansell Group, speaks on the phone in the conference room of the company's offices in 3630 Peachtree, a new office building in Atlanta. Photographer: Chris Rank/Bloomberg

For the workers at 3630 Peachtree, a new Atlanta office tower that sits 98 percent empty, life can be both lonely and gratifying.

“They treat you like a king,” said Andy McCartney, a vice president at Mansell Group, as he walks into a building where the digital marketing firm’s name is prominently displayed at the entry and its 27 employees enjoy prime space on a floor served by both elevator banks.

The 34-story 3630 Peachtree is a symbol of a construction boom that has saddled Atlanta with a 21.2 percent vacancy rate, the second highest among major U.S. markets, according to Cushman & Wakefield Inc. It was one of four buildings built without anchor tenants to open in Buckhead, the city’s priciest district, in a little more than six months in 2009 and 2010. The projects added 2 million square feet of space to an area that absorbs 10 percent to 15 percent of that amount a year.

Developers put 3.6 million square feet of office space on the Atlanta market from 2008 to the first quarter of 2010, Cushman data show. The firm calculates that about two thirds of that space was empty on June 30, accounting for almost 10 percent of all vacancies.

“We overbuilt leading into the current recession, and we are faced with weak demand,” said Chris Shaner, a senior research associate in Atlanta with Cushman, a commercial property broker based in New York.

Distressed Sales

Commercial real estate seized by banks after defaults on loans bundled into securities is higher in Atlanta than in any other city, according to data compiled by Bloomberg. Distressed sales of office buildings accounted for 46 percent of transactions in the year ended June 30, tops in the country, real estate research firm CoStar Group Inc. said.

“We are not used to Atlanta taking it on the chin harder than other folks,” said Lawrence Gellerstedt, chief executive officer of Cousins Properties Inc., an Atlanta-based real estate investment trust. Easy financing and eager institutional investors contributed to developers building skyscrapers as the economy showed signs of weakening, he said.

“All of this capacity of new product got in the pipeline and got a life of its own,” Gellerstedt said in an interview at his office overlooking downtown Atlanta.

‘Large Hole’

The city is among several major markets, including Phoenix and Seattle, whose pre-recession building binges have put them behind other cities in mounting office-market recoveries, according to Josh Scoville, director of U.S. research for CoStar.

“Atlanta has a fairly large hole to dig out of,” he said.

Almost $4.9 billion of securitized commercial real estate debt in the Atlanta area is on a “watch list,” meaning that firms that service the loans are monitoring them for possible default, according to Bloomberg data. At the top of the list is Bank of America Plaza, the Southeast’s tallest building, which has $363 million of debt.

Bank of America Corp., the largest tenant in the 55-story tower, plans to reduce its space to 13 percent from 30 percent and cut its rent to about half the current $36.65 a square foot, according to the watch-list data.

BentleyForbes Group Inc., which bought the 1.25 million-square-foot building for $438 million in 2006, expects to lease most of the bank’s vacated space to tenants who have been subletting, the Los Angeles real estate investment firm said in an e-mail. It said the tower is 84 percent occupied.

Watch List

Chris Egger, a spokesman for BentleyForbes, declined to comment on the watch status. Christina Beyer, a Bank of America spokeswoman, confirmed the reduction, effective October 2011, saying in an e-mail the bank no longer needs all the space now being subleased. The bank is expanding a program under which 700 local employees work from home or “drop-in” locations, she said.

Atlanta currently has enough empty office space to fill the equivalent of 24 Bank of America Towers, with vacancies of 30 million square feet at midyear, according to Cushman.

Owners of troubled properties, such as the Buckhead towers built on speculation, said they remain optimistic. Cousins Properties’ Gellerstedt estimates his firm’s Terminus 200 building could reach 70 percent occupancy by year-end.

Occupied space at the 3630 Peachtree building will rise to 30 percent from 2 percent following moves by newly signed tenants, Kerry Armstrong, a senior vice president of co-developer Duke Realty Corp., said in an e-mail. “Our outlook is positive.”

Financial Impact

The office glut has already caused financial pain. Cousins took a $39 million impairment charge on Terminus 200 in September 2009, writing off the full value of its investment and loan-payment obligations on the building, of which it then owned 50 percent. Duke Realty, based in Indianapolis, took a $50.3 million writedown in 2009 on its investment in 3630 Peachtree, whose $187 million construction loan is due in July 2011, according to Atlanta real estate market-research firm Databank Inc.

Office vacancy rates in Atlanta may not improve for another three years, said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina.

Atlanta’s growth in population and jobs has slowed after outpacing national averages before the recession. The city drew 99,262 people from other parts of the country in the year ended June 2006, according to Census Bureau data. That was the second highest of any U.S. city, said William Frey, a demographer at Brookings Institution in Washington.

10% Unemployment

Atlanta is no longer showing robust population and job increases. Unemployment topped 10 percent for most of the past year and exceeded the national rate for most of 2008, 2009 and 2010. While Atlanta’s office space increased 5.8 percent in the past five years, office jobs shrank 9.8 percent, according to CoStar.

“Atlanta won’t get to pre-recession employment until 2014, and we had vacant space before the recession,” Vitner said. “We are a long way to seeing the market return to healthy. We may not get to healthy rent growth until 2015-16.”

The city can’t count on a past generator of jobs -- attracting corporate relocations -- because its growth has created commuter delays that rank third behind Los Angeles and Washington, according to a 2009 study by the Texas Traffic Institute in College Station, Texas.

“The traffic situation has become a deterrent to companies considering moves,” said Dennis Donavan, a corporate-relocation consultant in Bridgewater, New Jersey. Atlanta’s gridlock figured into MeadWestvaco Corp.’s decision in 2006 to relocate to Richmond, Virginia, after considering Atlanta, he said.

Alison von Puschendorf, a MeadWestvaco spokeswoman, declined to comment.

Campanile Tower

Atlanta also has lost jobs to takeovers of local companies like BellSouth Corp., which was acquired by AT&T Inc. and whose absorption into that company left its Atlanta headquarters building 73 percent vacant.

Transwestern Investment Co. bought the 20-story property, known as the Campanile Tower, in 2007 for $98 million. The Chicago-based firm was one of many outside investors and lenders to expand Atlanta real estate activities during the boom. The building is now 86 percent vacant, according to Colliers International, and lender Wells Fargo & Co. foreclosed on it in February, according to Datapoint Inc. The Campanile was sold at auction in July for $36 million.

Transwestern didn’t return phone calls seeking comment.

Tishman Speyer LP, the New York-based real estate investor and operator, entered Atlanta in 2006 by acquiring a portfolio of properties from Blackstone Group LP for $675 million.

“We couldn’t afford, in the next 10 to 20 years, not to be in the Southeast,” Rob Speyer, now the firm’s president and co-chief executive officer, said in a speech in Atlanta that year.

Not in Default

The loans on two of Tishman Speyer’s Atlanta properties are on watch status, according to Bloomberg data, and a third is competing for scarce tenants with the other three Buckhead towers that were built on speculation. Tishman Speyer said that it is current on the debt-service payments on the two watch-listed buildings.

“The debt is not in default, and it will remain that way,” the company said in a statement.

Cousins Properties’ success with a building called Terminus 100, which opened fully leased in 2007, helped sparked the building spree in Buckhead. The firm itself had “good prospects” for major tenants in Terminus 200, the sequel tower, CEO Gellerstedt said.

“We knew some other developers were also thinking about starting buildings,” said Gellerstedt, who was then a senior vice president. “Our first building was doing extraordinarily well,” leading to the decision to start Terminus 200.

Competing Towers

When Cousins learned Tishman Speyer was also planning a tower near its newly acquired Buckhead property, One Alliance Center, it proposed that they team up on a building rather engage in a risky competition, according to Dan DuPree, then president and chief operating officer of Cousins. DuPree said Jerry Speyer, now Speyer’s chairman and co-CEO, turned that down. Rick Matthews, a Tishman Speyer spokesman, declined to comment.

Cousins began building Terminus 200 in July 2007, while Tishman began work on its own tower the following month. When two other Buckhead speculative buildings subsequently broke ground, DuPree said he was “astonished,” not at the builders but the bankers and investors.

“The capital markets have to share responsibility with the developers for this,” said DuPree, now chief executive officer of Reynolds Cos., an Atlanta-based resort and residential real estate firm. Banks, in their zeal to make construction loans and underwrite long-term financing, abandoned their former credit standards, he said. “Developers have unbridled optimism and will take the money when it’s given to them.”

Sad Sight

Retired Atlanta developer Blaine Kelley Jr., who built some of the city’s most prominent buildings in the 1980s and 1990s, said he rues skyscrapers raiding each other for tenants today. The competition has led to discounts that have driven down average office rents for nine straight quarters, according to broker Jones Lang LaSalle Inc. He said it signals that Atlanta’s decades-long growth has stopped and the prospects of a near-term restart are dim.

“Atlanta’s real estate economy was built on the information-economy explosion; my best customers were IBM and AT&T,” Kelley said. “That’s peaked out. Technology needs less space now.”

For the past two years, newcomers have been arriving at the lowest rate since the 1950s, according to Mike Alexander, head of research for the Atlanta Regional Commission, who blames people’s inability to sell their houses in other regions and move. Atlanta’s net population in-migration fell 82 percent from its 2006 level, to 17,479 in the year ended June 30, 2009, according to Census Bureau data.

Idled Homebuilders

Atlanta’s homebuilders, who had led the nation in single-family construction permits from 1995 to 2005, have been largely idled. Permit volume declined 91 percent from 2005 to 2009, according to the Census Bureau.

That has devastated businesses yoked to the fortunes of Atlanta’s subdivisions, like mortgage originators and construction lenders. Atlanta’s finance jobs fell 17 percent from their December 2006 peak to the second quarter of 2010, according to the U.S. Department of Labor.

“The decline in the financial-services sector and the construction sector are interrelated and feeding on each other.” Xu Cheng, an economist with Moody’s Analytics in West Chester, Pennsylvania, said in a telephone interview. “When the real estate market went down, Atlanta went down with it.”

The city’s other declining office-jobs categories at mid-year include information and telecommunications, down 12 percent since January 2007; and professional and business services such as accounting and law firms, down 10 percent since December 2007, according to the Labor Department.

“Atlanta was counting on real estate itself to be the underlying vehicle to carry the economy,” said Kelley. “Now we’ve seen how vulnerable that is to reversal.”

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