Real Estate Forum - September 2011

NEWS FRONT
Atlanta Office Recovery Still Five Years Out

ATLANTA—Despite the fact that the office vacancy rate is at a 20-year high of 20.28%, the Atlanta market’s freefall has slowed. Investors and landlords are holding out hope for job creation to drive up occupancy rates, but a significant government X factor could stymie a short-term recovery.

That driving factor is a White House-mandated reduction of the government’s real estate-related costs across the country. Legislation is being considered that would liquidate certain owned assets and consolidate or renegotiate leased assets.

John Connor, principal of turnaround
management firm Anderson Bauman
Tourtellot Vos, says the US government
owns or leases at least eight million square
feet of office space in the Atlanta region.
With about 2. 2 million square feet in leases
expiring from 2011 through 2015, and the
potential for the government to sell the
owned property and lease it back at or
below-market rates, he says this legislation
could have a significant impact on the local
office real estate market.

“A domino effect across the region
may cause a new round of commercial
real estate bankruptcies or abandonments that
would further depress the region.”

Georgia contains the fifth largest amount of government real estate in the country.

In his report, “Cloud on the Horizon:
Government Debt Reduction and the
Atlanta Commercial Real Estate Market,”
Connor explains that the impact of the
governmental mandate to Georgia, and the
Atlanta region, will be one of the highest in
effect across the region may cause a new
round of commercial real estate bankrupt-
cies or abandonments that would further
depress the region. Therefore, we may not
yet have seen the bottom in Atlanta, and a
recovery to the pre-2008 level will be hin-
dered by slow, or negative, regional eco-
nomic growth.”—Jennifer LeClaire

The Municipality’s Role in Boom-Bust Cycles

The real estate bubble spanning from 2000 to 2006 was driven by a basic economic system: when demand increases, production grows and sales commence. As development plans progress, one of the roles of a municipality is to maintain control as growth potentially climbs to unsustainable levels.

It is important though, not to misunderstand my view. I do not believe that complete interference or heavy restriction from the government is the best approach, either. Municipalities that have too many restrictions are those that tend to remain underdeveloped. Yet municipalities can control housing oversupply, prevent city underdevelopment and provide healthy infrastructure by balancing its regulations and engaging in open dialogue with development experts in an effort to create a comprehensive plan that determines the growth of a city in the years to come, and ensures its beautification.

During the inflation of the real estate bubble, when the thought of a burst was nowhere in sight, municipalities managed neighborhood development plans differently from one another, resulting in diverse outcomes post-market collapse. As a veteran developer of residential and commercial real estate (fortunate to have foreseen the signals of a massive downfall on the horizon in 2006 and suspended two projects before groundbreaking in Florida), I have observed the varying philosophies governed by individual municipalities.

Some cities encouraged a rapid influx of new construction and

By Fernando Levy-Hara

were extremely lenient about zoning requirements and design review, which led to a massive housing oversupply and, in some cases, underwhelming community appeal. Others claimed to welcome new development plans, but enforced so many restrictions that it would have been more fair for the city to put a temporary stop on construction altogether. Imposing such strict and particular requests makes it nearly impossible for builders to cooperate, as many of the demands cause major budget increases. Development gets halted in neighborhoods that need advancement, and city budgets are affected, since new development means revenue.

The goal is for municipalities to find a middle ground that enforces reasonable restrictions and encourages long-term vision for a city. Regulations are vital to maintaining the foundation, strength and character of an area. In the case of underdeveloped cities, having greater flexibility is preferred so as not to kill development efforts completely. On the other hand, in concentrated areas, receiving a more thorough development review and close guidance is recommended to prevent overbuilding and lack of supporting infrastructure.

There is no doubt that both regionally and nationally, we are learning from our mistakes. It is safe to say that, at least for this generation, we will never encounter another wave of unit oversupply. For now, it is the responsibility of municipalities and builders to work together to decide what is best for our cities long-term, and turn our knowledge into opportunity for a new real estate cycle.

Fernando Levy-Hara is CEO of Mckafka Development Group, an Aventura, FL-based distressed investment firm. He may be contacted at flevyhara@mckafka.com. The views expressed here are the author’s own.