By John Schaffner
Buckhead has 2.5 million square feet of office space coming on line this year, the absorption rate is about 250,000 to 300,000 square feet a year. That means Buckhead has a 10-year supply of office space coming this year — not to mention the vacancies already in the market.
“If you have money to invest in office buildings, Atlanta is at the bottom of the list in terms of recommendations to buy,” Fred Perpall, managing principal of The Beck Group, said during his “State of Commercial Real Estate in Atlanta” talk to the Buckhead Business Association in April.
“That is primarily because we have so much office space, so much more supply than we have demand, that if you are the owner of an office building, your leverage to negotiate a good rate with your tenants is low,” he said. “But this is good for all you guys who are into leasing space, because your leverage is high.”
Perpall, who runs Beck’s Atlanta office and the company’s business in the Southeast, said: “Most people think real estate is about buildings. But mostly, real estate is about finance.”
He told the business group that access to capital is the driving force in real estate cycles. “Where there is a lot of money, asset managers feel there is a percentage of that money that should be in real estate. Whether there is a demand or not, money becomes available to people who develop commercial properties.”
Perpall said money was cheap and easy in 2003 and 2004. “You could just tell them what you made, and you could get a mortgage for $1 million, because money was just that cheap. There was a lot more liquidity. There was a lot more cash in the market than there was home for that cash.”
Buckhead had a real demand for commercial buildings in 2003 and 2004, but the demand was far less than the money available.
“So, as we look around our city today, we currently are in a situation where we have had very cheap money, we have had some demand, but we have built much more than we really need,” Perpall said.
“That is the history of Atlanta,” he said. “We go through these cycles of booms, where we build a lot, and we go through cycles of bust, where we take some time to absorb what we had built.”
He said the same situation exists in retail development, explaining that Beck is doing work for Sembler.
“You have probably noticed that Town Brookhaven is going really slow,” he said. “It is not going slow because we build slow. It is going slow because there is a limited demand, so taking a longer time to build provides a longer time to find tenants.”
He pointed out that in retail, Atlanta also is at the bottom of the list among major markets in terms of capital market recommendations to buy. “This is pretty challenging,” Perpall said. “In Atlanta, we have built a lot, and we have a lot of nice new developments. But we really have overbuilt in a lot of ways.”
He said Atlanta has never returned to the high level of demand that existed between the 1996 Olympics and 9/11, “yet that hasn’t stopped us from building.”
He said every market in the country is trending down, with the exception of Dallas and Houston, which are doing well. “They have shown more restraint in their markets in how they have invested and how they have married up with demand. Consequently, there is a little more demand, a little more opportunity in those markets.”
Miami is the only major U.S. city doing worse than Atlanta, according to Perpall’s research.
Perpall said the future is about collaboration. “We have an opportunity to collaborate globally. The demand in the real estate market here probably will not be back in the next 10 years. Our opportunities are going to be in other places around the world.”
He also told the BBA members that the conventional business they had going into the recession “will not be the business that emerges through this downturn. So how are we being creative with our products, with our offerings? The business that we have now probably won’t be the business that capital investment flows to in the future.”
He predicted, “Capital investors won’t be funding the projects of yesterday. They will be funding the projects of tomorrow.”
He said a recent poll showed that 55 percent of people prefer to live in walkable, dense, urban environments. Yet 90 percent of our housing supply is in suburban markets. He said that represents a major disconnect.
Two last points from Perpall: “My advice to small businesses or any business is this is the time to rethink your office space. You have a lot of leverage. And real estate is all about access to capital and demand. The run-up is usually much slower. So be strategic in planning your real estate investments.”