John T. Adams, a self-described lover of American history, envisioned retail destinations from bygone eras.
The developer of two suburban Atlanta retail centers‚ Crabapple Mercantile Exchange in Milton and Ellard Village in Alpharetta, paid attention to the little details. Wrought-iron fences, wooden overhangs, historic-looking brick facades.
But recently, both of his elegant projects were repossessed by his bank, Flagstar of Troy, Mich.
To be sure, Adams’ ambitious projects are part of what made them financially unwieldy.
But economic conditions‚ a lengthy recession that has hurt retailers as much as anyone‚ are part of the formula that is making retail foreclosures a new part of the economic landscape in Atlanta.
According to several retail experts, banks are beginning to foreclose on retail projects as they see little hope for the current owners to keep them stable — meaning full of tenants that help pay the mortgage.
While residential properties started falling into foreclosure in 2008, experts interviewed by The Atlanta Journal-Constitution said they are just starting to see retail developments get taken back by banks or sold on courthouse steps.
It may not be easy to spot these projects, however. Some might not be entirely vacant or seem to have vacancies at all.
Take those that Adams built, for example.
Both of his projects were more than 50 percent leased; one was 89 percent leased at one point. But his problems emerged as the economy cooled. Now “for lease” signs pepper the Ellard Village project, and one of the spaces in Crabapple is incomplete, waiting for a tenant.
What happened to Adams is emblematic of the retail development industry: As fewer consumers pulled out their wallets, retailers pressed developers for concessions on rents.
Rents, however, are based, in part, on development costs as well as market conditions. During the boom times, developers were seeing rents steadily increase and many retailers expanding. For example, quoted retail rents in metro Atlanta peaked in the third quarter of 2008 at $16 per square foot, according to a report by CoStar Group, a real estate information firm. In the third quarter of this year, they had plummeted to $15.17, a level not seen since the end of 2006.
Developers can only lower rents so much before they can’t meet their mortgage payments. If they can’t give tenants enough in concessions, the tenants might close, leaving shuttered store windows and less income from the property.
Alan Wexler of Databank Atlanta, a real estate research firm, said that he’s only recently started seeing more retail projects get taken back by the banks.
“It’s a trickle right now because the lenders really don’t want to take these things back,” Wexler said. In addition to not wanting to become property managers, these projects “have no value” for the banks, he explained.
Like underwater homeowners whose houses cannot sell for the amount owed, many retail properties that were purchased and developed in the past three years are no longer worth their mortgages.
“Now I’m beginning to see a trickle of foreclosures because these are the ones that really have no hope,” Wexler said. “The lenders just throw up their hands and take them back. Next we’ll start seeing them getting sold for pennies on the dollar.”
Again, Adams’ two mercantiles are good examples.
The bank already accepted a loss of about $3.4 million on the Crabapple Mercantile Exchange mortgage and about $1.3 million on Ellard Village when it took them back on the courthouse steps, according to documents from Databank. Databank listed mortgages at $7.4 million and $9.1 million, respectively.
Kyle Stonis, a broker for Bull Realty who is now marketing Adams’ projects to sell on behalf of the bank, said the bank may have taken more losses than that before the properties made it to auction.
His job is to stabilize the properties by finding new tenants, then sell them so that the bank can get “the best price.”
But he acknowledges that he is open to just about anything. “Right now we’re looking at all offers on the properties,” he said.
These aren’t the only two properties that have fallen into foreclosure. Just in the past few weeks, Databank has found properties from Roswell to Lawrenceville to Lithonia that have been either reclaimed by banks or bought on courthouse steps.
Just because the properties were foreclosed upon, however, doesn’t mean retail tenants must vacate.
On the contrary, the bank or new owners will try to keep properties leased, and current tenants will get priority treatment, as it’s easier to keep a tenant in this economy than find a new one, experts said.
While specific data is difficult to find on the number of retail projects in foreclosure in Atlanta, Wexler said he’s seen a recent uptick as he’s been monitoring sales activity. In his records, he found nearly 25 retail foreclosures since the beginning of the year.
Most were small centers‚ less than 45,000 square feet (malls have anywhere from 100,000 square feet to more than 1 million square feet). The foreclosed properties were scattered across metro Atlanta, from Sawnee Corners in Cumming to Stockbridge Village in Stockbridge.
Real estate attorney Phil Skinner with Arnall Golden Gregory explained the foreclosures this way: “We’ve been in this recessionary economy for 18 months. At this point, it’s a question of how long any given owner/borrower can hang on if their asset isn’t performing well. You can usually hang on two to six months. But when we get to 12-18 months, and experience store closures with retailers of various sizes, it becomes the straw that breaks the camel’s back.”
He said that just as developers were getting asked for concessions from tenants, banks were getting asked for concessions from developers, which pushed them to a breaking point as well.
“I think we’re just feeling the cumulative weight of the passage of bad times,” he said.
Still, while this means tragedy for some, others see opportunity, said Jonathan Dubovsky, director of leasing for the Georgia division of the Shopping Center Group, a large retail brokerage based in Atlanta.
First, developers or others who have cash to spend can buy retail centers for just pennies on the dollar in terms of what they cost to build.
Second, the situation is opening the door for some retailers to grow in projects they could never dream of before.
“Discount retailers are getting opportunities to lease prime spaces in shopping centers that they most likely never would have seen have three years ago,” Dubovsky said.
Examples include dollar stores such as Dollar General, discount chains such as Big Lots, T.J. Maxx and CitiTrends, and grocer Food Lion, which is making a big play in metro Atlanta.
Fitness chains are also finding it easier to take large spaces in retail developments. LA Fitness and Workout Anytime have been growing fast in Georgia.
Still, the worst could be yet to come.
“We haven’t reached the peak yet,” Wexler said. “But we’ve started having these large vacancy problems.”
Skinner said the holidays will separate the weak from the strong: “If you write a story now and another in January or February, there will be a big change.”
Third quarter 2009 vs. third quarter 2008
Vacancy rate: 10.7 percent, up from 8.4 percent
Quoted rental rates: $15.17 per square foot, down from $16
New buildings completed: 19, down from 44
Source: CoStar Group
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