Atlanta office space remains hard to fill

By Russell Grantham

The Atlanta Journal-Constitution

When the real estate markets crashed in Dallas, Houston and other then-booming Texas cities two decades ago, the event helped ignite a financial meltdown and federal bailout that would look very familiar these days.

It also spawned a new term that could be applied locally: “see-through buildings.” Financed by banks and thrifts that later failed, the new skyscrapers and other buildings that flooded the Texas market had so few occupants that many looked practically transparent to passers-by.

Although granite and other materials often have supplanted those glass towers of the 1980s and 1990s and perhaps obscured their “see-through” aspect, many of Atlanta’s offices, retail centers and condominium and townhouse projects are similarly vacant.

While experts say there aren’t overall figures for total vacant buildings in metro Atlanta, available figures show the market has been hit hard.

More than 22 percent of finished office space in the Atlanta market was vacant in the second quarter, higher than in more than two-thirds of the other major U.S. markets surveyed by commercial real estate firm Jones Lang LaSalle. Likewise, Atlanta’s retail space showed a 16.6 percent vacancy rate in the second quarter versus the national average of 12.6 percent, according to National Association of Realtors estimates.

While local market players say vacant projects will depress real estate prices and lease rates for years to come, some appear to be recovering more quickly than others.

Some completed projects are selling units, but only after steeply discounting their prices by 30 percent or more, potentially worsening losses for competing developments. Other projects remain unfinished, tangled in lawsuits, foreclosure proceedings and kudzu vines that threaten to prolong the pain.

“You just drive around and you see all kinds of [vacant] projects,” said John Little, president of The Plinth Group, an Atlanta developer of multi-use projects. Some vacant buildings are completed and waiting for buyers. Others stalled before they were finished.

‘Still seeing caution’

Little doesn’t have to look far to see an example.

The developer is currently working out of one of the units of One Riverside, a complex of retail and office units, town homes and so-called “live-work” units for live-at-home entrepreneurs that his company created. The first phase of the $12 million project in northwest Atlanta was completed in early 2009, but hadn’t sold any of its 19 units by late last week.

But after cutting the prices of some units up to 20 percent and retiring about $3 million in debt, Little believes he’s making progress.

“We’re seeing traffic pick up but we’re still seeing caution in the marketplace. People wonder whether the market has hit bottom yet,” he said.

He expected to have a signed sales contract on one live-work unit within days, and hoped to soon have buyers for two other units and the project’s restaurant space.

“This is a major milestone for us,” said Little.

Likewise, Castleberry Point, a $33 million-plus mixed-use condo and retail development near downtown Atlanta, has sold about 60 percent of its 110 units — after cutting its prices by roughly 40 percent.

Such steep discounts have been common after banks foreclosed on failed projects. They likely will continue for three or four more years, Little predicted, as banks sell foreclosed, unfinished projects to new developers.

“The bank will sell it to a secondary developer who will develop it and sell it at a huge discount to the consumer,” he said. “They just kill the market.”

Leasing one option

Some owners have turned to renting out rather than selling condos. When Tivoli Properties completed a 20-story condo tower called Mezzo in Buckhead in 2008, few buyers showed, so the building was converted to luxury rentals.

The Peachtree Street building has been “leased very successfully,” said David Tufts, president of The Marketing Directors, a real estate brokerage. “It’s hardly a vacant building,” he said.

The project, which went into foreclosure earlier this year, was financed by Chicago-based Corus Bank, which failed last September.

Tufts said relatively few of Atlanta’s new condo and apartment skyscrapers could be considered “see-through” buildings.

One “egregious” exception, he said, is the Mansion on Peachtree. Much of the 42-story hotel and condo building in Buckhead remains empty. The troubled project was sold to its lead lender, New York-based iStar Financial, in a foreclosure auction in February.

Other less prominent projects sit silent and empty in formerly up-and-coming neighborhoods such as Atlanta’s Memorial Drive corridor. Before the real estate boom ended in late 2007, developers planned to build roughly 900 condos, apartments and shops along a 1.5-mile stretch of Memorial, often in former industrial buildings.

However, some projects now look almost as abandoned as the gritty factory buildings and derelict houses they replaced.

Unfinished, uncertain

An eight-foot chain-link fence and construction debris surrounds The Carlyle, a mixed-use townhouse project on Memorial. A faded sign advertises luxury condos “from the $340s.”

While some of the four-story townhouses appear almost finished, many of the originally planned 36 units were never built. Bare foundations, weed-choked lots and unfinished exterior walls — some with mortared but loose bricks still lying where departing workers left them — point to a sudden shutdown of the project.

The developer, builder and real estate broker involved in the project did not return a reporter’s calls.

The project’s estimated cost was about $10 million, according to Reed Construction Data.

Legal filings hint that it could be a while before workers return again.

The project’s lender, Bank of Atlanta, foreclosed on the property in December 2009, according to Steve Palm, president of SmartNumbers, a real estate data firm in Marietta.

A few days later, the project’s builder, Tucker-based Standard Building Co., sued developer Charity Garcia of Stone Mountain and her firm, Citi Heart Developers, seeking more than $1.3 million in unpaid construction bills and damages.

The two sides wrangled for more than six months over what documents Garcia would have to turn over to the builder’s lawyers.

Through filings to the DeKalb County Superior Court, the developer countered that Standard Construction Co. had left several construction defects and diverted money to other projects.

In March, Garcia’s lawyer pleaded for more time, saying her client had undergone emergency surgery and had paid more than $1 million to the builder during the three-year project.

In June, the judge told the developer to turn over the requested documents within two weeks, but by then, the builder’s interest in pushing the case was apparently waning.

Lawyer Roger Krause said he is no longer representing Standard Construction Co. in the case. He declined to comment on his former client, but added that clients usually don’t continue lawsuits if they don’t believe there’s any money to recover.

High-vacancy markets

Atlanta ranked among the nation’s worst-hit markets in terms of large numbers of vacant office spaces and buildings in the second quarter. Here are the markets with the highest office vacancy rates, according to a study of 39 major markets by commercial real estate firm Jones Lang LaSalle:

MarketOffice vacancy rate (percent)

San Francisco Peninsula 27.6

West Palm Beach 26.8

New Jersey 26.4

Detroit 25.5

Dallas 24.8

Phoenix 24.6

Silicon Valley, Calif.23.3

Fairfield County, Conn.23.1

Sacramento22.3

Tampa22.2

Cleveland 22.1

Atlanta 22.1

Source: Jones Lang LaSalle