As the number of companies downsizing and going out of business increases, building owners are suddenly finding themselves with large amounts of space to lease. Industrial and office markets in particular have been hard hit by corporate scandal, bankruptcies and rising vacancy rates. Many building owners are spending a lot of time focusing on retaining tenants while trying to close new deals. The amount of available sublease space continues to rise, and owners are backfilling large blocks of space with smaller tenants.

With the drop off in demand, the markets are “just depressing” right now, according to one Southeast executive. Even Atlanta, historically a prime location for new business and expansion, is now facing company downsizing, closings and large amounts of vacant space.

Despite this grim picture, many developers are positive about the new year. Available space is slowly being absorbed, prompting developers to continue with new, sometimes speculative projects, many of which will come on line this year.

Renewals

One indication the market isn’t doing too poorly is renewals, which are up in most markets. “Many tenants don’t want to lose focus of their current business operation or incur the costs that are involved in planning a relocation unless they have to,” says Allen Aldridge, vice president and regional manager of CMD Realty Investors’ Southeast region. “So you’re seeing a much higher percentage of tenants staying put, assuming that the current owner is competitive in the market, which most are.”

“Renewals are critical in today’s environment, and it can be very competitive to try to retain a tenant that’s up for renewal,” says Julian Brown, senior vice president of Lincoln Property Company. “You’ve really got to offer a lot of concessions because the tenant can move and get concessions from someone else.”

Sublease Space

There is still a large amount of sublease space on the market, which isn’t a new thing. “We’ve started to see a trend in the increased amount that companies are willing to pay to buy out those leases,” says Aldridge. “Some companies are now paying up to 100 percent of their outstanding lease obligations to make them go away. We had a recent deal in South Florida with a credit tenant, a sizeable corporation that had a 5,000-square-foot sublease with a year or year and a half remaining.” The tenant recognized that the odds of leasing that space in the next year and a half were minimal, and the amount of time that company would spend attempting to lease the space would be more trouble than it was worth. “They decided to just pay it off and move on — getting rid of that space obligation,” he explains.

In terms of size of the deals, not many large tenants are looking for space, Aldridge notes. “In fact, if you go down a list of national companies or even regional companies, they’re all giving back space,” he continues. “We’ve played a part in that. We took about 100,000 square feet back from SouthTrust Bank last year after they did a build-to-suit operations center. We certainly don’t anticipate backfilling that space with 100,000-square-foot users. We’ll have to fill it back up with 5,000-, 10,000-, 15,000- and 20,000-square-foot users.”

Through discussions with Bill Weghorst of Insignia/ESG and other Atlanta brokers, Aldridge has discovered that, while there is a great deal of large block space available in Perimeter Center, there are few active deals above 7,000 square feet. “That was just unheard of a couple of years ago,” says Aldridge. “There would normally be a lot of big block users down there. I think that’s going to continue, and that’s going to make this harder. It’s going to take more time and it’s going to make it more difficult to backfill the space that’s currently vacant.”

Done Deals

“Since April 2002, we’ve signed about 241,000 square feet in leases [in Atlanta], which is pretty good, considering some markets have had negative absorption,” Brown notes. “We’re really excited about that. In addition to the three leases at Airport-West, we closed two leases in the Northeast submarket: a 65,000-square-foot deal with a company called Infinite Dimensions, and a 102,000-square-foot lease with Climatic Corporation.” Denton Shamburger, also of Lincoln, helped lease this space.

The company signed a total of 74,000 square feet in leases in its Airport-West Distribution Center, a speculative project totaling 287,990 square feet in south Atlanta’s Airport submarket. After the company delivered buildings 100 and 200 in April 2002, Bank of America signed a 30,000-square-foot lease for its back office operations facility, Penske Logistics signed 30,000 square feet and Chick-fil-A took 14,000 square feet.

“Most of [our tenants] like the fact that Airport-West has great interstate access,” says Brown. “That’s been a big attraction, and I think that’s what’s been driving that whole South Fulton County corridor. Costco, GE, Kellogg and Caterpillar and some other companies have located there.” Airport-West is located within 5 miles of interstates 85, 285 and 75 and just minutes from Hartsfield International Airport.

“We signed 400,000 square feet of leases in the fourth quarter of 2002, but it was a slow year,” says John McDonald, president of McDonald Development Company. Slow or not, the firm continues to make deals and is excited about success of some of its most recent projects.

Recent Developments

In 2002, McDonald Development completed a 280,000-square-foot cross-dock building at WestLake in southwest Atlanta. To date, the company has leased 190,000 square feet at the new facility: 115,000 square feet to Clean Rite, a company that sells supplies to auto stores, and Kent Landsberg leased 75,000 square feet.

The company also delivered a building in Horizon Ridge, a park located east of Atlanta in Gwinnett County. It is a 295,000-square-foot building that is expandable to 624,000 square feet. “We anticipate having one to two tenants; it will be distribution because of the cross-dock nature, and we would anticipate 5 to 15 percent office,” says McDonald.

“We also completed a 272,000-square-foot cross-dock expandable to 1 million square feet in our South Park development in Clayton County,” McDonald continues. “We’ve leased 200,000 square feet of that building to a retailer that’s moving into Atlanta.”

In addition to northeast Atlanta, which is strong because of sheer size (it is Atlanta’s largest industrial submarket), McDonald and Brown agree that the Airport submarket in south Atlanta is one of the strongest markets in the city for industrial development. This is evidenced by Lincoln’s Airport-West Distribution Center. The company broke ground on Airport-West on Labor Day weekend 2001. A little over a week later the September 11 terrorist attacks occurred, slowing down the kick-off. “In spite of that, we have been very fortunate,” says Brown. “We got three good tenants in there pretty quickly. We have one other tract that we can turn into three more buildings, but we won’t start that until we get [the existing buildings] up to about 80 percent occupancy.”

“Activity has been fair on the south side [of Atlanta] in spite of what the rest of the market has done, and we hope it will pick up with the economy,” Brown adds. “A lot of that has been driven by the expansion of the fifth runway at Hartsfield International Airport.”
One indication of this area’s strength is Oakmont Industrial Group’s development plans. “Oakmont Industrial has contracted to buy the 48 acres directly across from us on Naturally Fresh Boulevard,” says Brown. “I think that’s just another affirmation that this area’s going to continue to grow.”

Buy or Sell?

Many companies, including CMD Realty Investors, have what would seem to be an unusual problem: money to invest but nothing to buy. Well, nothing worth buying, anyway.

“We currently have about $300 million to invest, but the opportunities are very difficult to find right now,” says Aldridge. “There is a very wide gap in the available properties that are out there and the prices that they trade for. Assets that are leased up well into the future are trading at historically low cap rates and extremely high values.”

CMD is currently selling some of its well-positioned Southeast assets. The properties are leased out long-term with good credit tenants. “People are paying a lot of money for that product right now,” says Aldridge. “On the flip side, they aren’t paying that much money for the opportunity properties, and therefore there are not many opportunity properties for sale. Still, there’s not a lot of trading, and it’s very difficult to try to place all the capital that’s currently out there. I think you’re going to see increased pressure to try to place that capital in 2003, but it’s still going to be a difficult job, and we’re going to be in that tight boat.”

McDonald explains the mindset of many companies in the market today: “Everyone is trying to maintain their existing tenants. Fully leased buildings have low cap rates today. People are willing to pay more for them because there are less of them. If a building is less than 85 percent leased, the buyers want to bargain.”


©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.