Atlanta has too much retail to justify "cautious optimism"

By Jack Arnold, director of retail leasing, Carter

(Oct. 2, 2009) ATLANTA – In the retail leasing world, “cautious optimism” is the phrase du jour.  

Activity has increased notably in the last month or two from the previous 10 to 12 months. The credit markets have loosened enough to allow smaller franchisees and local operators to get back in the game.  The larger corporate tenants, after spending a year-plus on the sidelines making long-overdue adjustments to their corporate strategies, have slowly re-emerged to implement their new, smarter and more-conservative game plans.  

Highly motivated landlords in virtually every trade area offering extremely attractive concessions to worthy tenants.  Much like in the over-developed Atlanta office-market, the time is now to be a tenant. And leasing activity is reflecting the move of these tenants off the sidelines.

However, the ugly truth lies in why landlords are now so motivated to make deals. Go look at even some of the most traditionally strong retail trade areas—Alpharetta, Johns Creek, Midtown, Smryna, etc – and you will see an alarming amount of vacancies, mostly of the small, unanchored strip center variety (independent, inexperienced owners).  

Some Landlords, such as Carter, remain in very strong positions—low vacancies, strong tenant bases, attractive and well-positioned properties, favorable lending relationships.  Such Landlords can get aggressive to stay competitive in a tenant’s market, but are fortunate to have avoided the unfavorable position that confronts the majority of landlords out there today: desperation. 

The lack of significant transactional volume in the past year and half has contributed to increasingly desperate landlords. The overall economic downturn and the credit crunch have played a role, too. But the main problem is the overdevelopment of the Atlanta retail markets, from the largest and most respected developers in the business down to the mom-and-pop one-off developers. Too much product remains available with too small, too expensive or simply too few tenants to fill it. Consequently, desperate Landlords are willing to make virtually any deal happen in order to pay their debt service and temporarily plug their quickly sinking ships.

But eventually, the “other shoe” will drop, and we will see the commercial real estate markets mirror the catastrophe that occurred in the residential markets, with retail leading the way. And it will happen soon. 

A massive amount of retail product will be returned to already over-exposed lenders. What will happen then? Plenty of buying opportunities to be sure, and likely even more bank failures. But what are the larger economic consequences of such a flood of product returning to lenders? 

Cautious optimism is not the right phrase to describe the current attitude toward that particular situation.


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