Real estate dirty bomb 
is ticking

By Thomas Oliver

The Atlanta Journal-Constitution

We may have reached the bottom of our economic descent, but certain segments remain more like black holes that threaten what is likely to be at best an anemic recovery.

The dirty bomb of commercial real estate hasn’t detonated yet, though many of us expected it by now. Part of the delay has been the unexpected sleight of hand the Fed and Treasury performed in doling out money to the banks rather than forcing them to deal with their bad loans.

Banks hold half, or $1.8 trillion, of all commercial real estate loans, according to the Fed. At the end of the first quarter, delinquency rates on those loans had doubled to 7 percent from a year earlier.

Dennis Lockhart, president of the Atlanta Fed, explained the threat to recovery this way last month in Nashville:

“The risk I’m watching most closely is commercial real estate. There is a heavy schedule of commercial real estate financings coming due in 2009, 2010, and 2011.”

Problem is there isn’t much financing going on. As Lockhart puts it: “Banks generally have no appetite to roll over loans on properties that have lost value in the recession.”

Kris Cooper, manager director at Atlanta’s Jones Lang LaSalle, a commercial real estate services firm, says little happens without financing.

“We may be at the bottom, but until lending comes back, we’ll be here for a while,” Cooper said.

Others say we ain’t seen nothing yet.

“We aren’t anywhere near the bottom,” says Jay Mannelly of Bullock Mannelly Partners, one of Atlanta’s long-running commercial real estate firms.

Disappearing tenants and new space coming online are devaluing properties that can’t get refinanced.

“It’s a train wreck,” Mannelly says.

Indeed, Jones Lang’s research manager Lanie Rea says nearly 2 million square feet of new, Class A office space will come on line in Buckhead by early next year, with barely a corner office pre-leased. That could send Buckhead’s vacancy rate from 16.2 percent to 24.1. That’s a 49 percent jump, or nearly twice the increase since 2007.

That would make 2008 and this year seem like basic training for what’s about to unfold over the next tortuous two- to three-year period.

But Rea says real estate folks are used to the hard times, so next year’s knockdown won’t be as shocking.

Plus, in the long turn, Buckhead is Buckhead.

But the more pressing question might be: Is Atlanta still Atlanta?

In the past, Atlanta bounced back from an office glut with a surge in employment, as those offices and shops were filled by deals with employers just waiting for an excuse to move to Hotlanta.

But a federal judge in Minnesota has changed the economic development paradigm in giving Georgia three years to sweet talk Florida and Alabama into letting us continue dipping our ladle into Lake Lanier.

Until a deal is worked out, Mannelly says, not many employers are going to voluntarily move to a city that might get wrung dry.

In which case, we don’t have three years.

Thomas Oliver writes a business column. He can be reached at toliver.writeright@gmail.com .