How crash hit big downtown Atlanta development

Just before Bruce Gallman and Jerry Miller opened their $33 million-plus Castleberry Point project near downtown Atlanta in the fall of 2008, they thought they had 70 percent of the units sold.

Then the economy hit the skids.

Nearly two years later, they consider themselves lucky to have sold 60 percent of the units.

“We had a lot of pre-sales that walked away” during the turbulent months after the October stock market crash and collapse of some Wall Street titans, said Gallman. Only a fifth of those original customers actually completed their deals, he said. “People were afraid.”

The ensuing nationwide meltdown of the real estate and financial markets hit metro Atlanta harder than most places, causing many developers and lenders to fail.

But some that completed projects during the depths of the crisis, like business partners Miller and Gallman, are still scrambling to avoid foreclosures through steep price cuts, concessions from their lenders, and perhaps a little luck.

The two developers largely have given up hopes of recapturing their investments or reaping the profits they once dreamed of. Still, they hope to pay off their bank and minimize losses.

But even those could be tough goals to meet these days. Many of the would-be shops in the mixed-use development remain empty. That reflects Atlanta’s lagging market for retail space, which had 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.

Likewise, Castleberry Hill remains a tougher sell than other condo-rich parts of Atlanta such as Midtown and Buckhead, said real estate broker Marilou Young, with Ian Marshall Realty. Castleberry Hill’s “bohemian vibe” appeals to a smaller subset of condo and loft shoppers, she said.

Castleberry Point’s partners acknowledge the challenges. “We’re still in the middle of this,” said Miller. But they hope to emerge some day from their rescue efforts to build again.

“Whether I live long enough is another question,” Gallman, 64, said with a grin.

An ambitious plan

Gallows humor surfaced often during a recent tour of the sleek development of 110 loft condos and retail spaces in the funky arts district southwest of downtown. What would have to happen for the partners to turn a profit? Said Gallman: “It would take a miracle.”

This was not how things were expected to turn out when, in 2006, the longtime partners in Miller Gallman Developers first conceived of what was to be their grandest and last project together.

Gallman, of Social Circle, and Miller, 59, of Atlanta, had started working together in 1995, renovating former factories and other old buildings into modern loft condominiums in Atlanta, Athens and Columbus. Within a few years, they had switched mostly to new construction, building several new condo, townhouse and mixed-use loft developments in the Castleberry Hill, Midtown and Reynoldstown neighborhoods in Atlanta and in Covington.

Like the other projects, Castleberry Point would superficially resemble the old warehouses that are its neighbors. But the 110-unit, five-story structure fills an entire city block, with shops and restaurants on the first floor, residences on the upper floors, and a large inner courtyard and parking structure on the interior.

As the partners planned the project during the height of the real estate boom in 2006 and 2007, they expected the lofts, with high ceilings and giant windows, to sell for $160,000 to $700,000 for the largest penthouse unit. They expected to fill the retail spaces with art galleries, boutiques, wine and coffee shops, a grocery and restaurants.

In retrospect, the partners said as they stood on the top floor of the complex and showed off the penthouse units, rooftop pool and courtyard fountain far below, they should have left their dream on the drawing board.

“If you had really known the depth of what was coming, you would have done nothing and stayed in cash,” said Miller.

Pre-sales evaporate

Their plans unfolded as expected at first. Wachovia Bank — later taken over by Wells Fargo — agreed to lend $23 million to the partners. Miller and Gallman agreed to personally guarantee repayment. The partners began building in 2007.

By the summer of 2008, they were almost done. They had recruited many of their retail tenants. The owners of the Apres Diem and Carpe Diem bistros in Midtown and Decatur were going to open a new restaurant in one prominent corner space. Wine Shoe and ZuCot Gallery were among several other retail tenants. About 70 would-be buyers had paid deposits on loft units.

When Napoleon Williams, 35, became the project’s second resident that fall, in a live-work unit that includes both his Vitesse eXchange clothing boutique and living quarters upstairs, he expected plenty of other neighbors, including two restaurants, a bookstore and a fitness center.

He enjoyed the quiet at first. “I didn’t realize how bad it was,” he said. A few months later, he heard that Apres Diem’s owners had ditched their plans.

When the credit markets on Wall Street froze up that fall, “the 70 pre-sales we had evaporated into 15 sales that actually closed,” said Miller. Several retail tenants walked away. “We knew we had to retrench,” he said.

Still, he and Gellman acknowledged, they were slow to realize the challenge they were facing. Miller said they were reluctant to lower prices. Some economists were predicting at the time that the economy would recover the following summer.

“We thought we had brought [the project] out at the bottom of the market rather than the beginning of the crash,” said Gallman. They would learn they were wrong.

A ‘painful’ process

These days, Castleberry Point is offering its lofts at prices ranging from $99,000 to $400,000 — roughly 40 percent lower than the original plan.

“Fundamentally, we’re selling below costs,” said Miller.

They are competing, said Gallman, with 3,000-4,000 similar units in the metro Atlanta market — roughly a three-year supply at current sales rates.

Besides drastically lowering prices, the partners said they’re also trying to raise the development’s profile through online marketing, offering extra incentives to brokers and offering free parking and other draws during the Castleberry Hill neighborhood’s monthly 4th Friday Art Stroll.

The efforts have paid off — but at a price.

They have sold about 60 percent of their units, the partners said, and paid their debt to Wells Fargo down to $14 million.

But there’s no money left to cover their costs from such sales, meaning they’re basically managing the project, for a fee, on Wells Fargo’s behalf. Meanwhile, the partners said, they would have faced foreclosure and possibly much bigger losses if the bank hadn’t agreed to extend the loan and leave sales and management to them.

Still, both partners said their losses so far have affected their fortunes and their families, but didn’t elaborate.

“It’s painful and it’s caused a lot of retrenchment,” said Miller.

“A total change in lifestyle. Every aspect,” said Gallman.

Signs of optimism

Some in Castleberry Point said they’ve seen improvements in recent months.

After more than a year of near-solitude, Williams said he’s seeing more cars in the parking deck and more neighbors in the halls.

“It’s picked up a lot this year,” he said, though he wishes that translated into more foot traffic in the area. “It’s much slower than I anticipated,” he said.

Around the corner in the same complex, Math Sterling recently opened a J.R. Crickets sports bar to be close to the Georgia Dome and in a neighborhood he believes is on the upswing.

Customer visits are lighter than expected, said the 50-year-old Fairburn man, who owns a similar bar in Savannah.

“It’s going to be all right,” he said. “Castleberry is a good area. I can remember when this wasn’t too good an area.”

Miller and Gallman hope he’s right. They still need to pay off their debt, and both have land or plans for future projects in the area.

“We still have a fighting chance of getting [Wells Fargo’s] money back,” said Miller.