Trouble in China. Falling oil prices. Unsteady stock market. Slow employment growth. Stagnant incomes. That’s a heck of a way to start a new year, isn’t it?
In the real estate universe, an abundance of capital and cheap financing have once again pushed prices up to record levels. My friends in the capital markets tell me that investment activity flattened toward the end of last year, as both investors and lenders became more cautious.
Do these macro events portend the end of the slow—if resilient—economic recovery? How will Atlanta be affected?
So far, Atlanta’s commercial real estate market has performed well during this recovery. Led by multi-family development, occupancy and rental rates have both been ticking up. In 2015, new construction has increased in all sectors. Will this continue in 2016? For my part, I have a few questions (and a few predictions) about how things will shake out over the next 12 months. Here they are:
Multifamily: A localized bubble?
Anyone with eyes has noticed the tremendous amount of apartment inventory coming online in Midtown, Buckhead and Brookhaven. I can’t help but think we’re closer to the end of this development boom than we are to the beginning. In another year’s time, I expect this new supply to exceed demand, spelling trouble in those markets.
Almost unnoticed has been the surge in high-density mixed-use developments (including apartments) in several of Atlanta’s rapidly changing suburban “city centers” – places like Alpharetta, Roswell and Sandy Springs, among others. Look for this trend to continue and succeed in those areas.
Industrial: A mixed outcome from mixed-use?
Atlanta’s real estate market is being driven by several major developments: SunTrust Park, Mercedes Benz Stadium, the GM assembly plant redevelopment and the Georgia State expansion, to name a few. One consequence of this has been the demolition or repurposing of close-in industrial buildings. The occupants of these buildings have to go somewhere, so I expect there to be a resurgence of close-in suburban industrial parks. Meanwhile, the shrinking remaining stock will be leasing at a premium to companies intent on central locations.
Retail: What’s up with all these restaurants?
I recently saw some research indicating that most of 2015’s increase in consumer spending was due to auto sales. In fact, vehicle purchases have grown so much that car loans are actually crowding out other consumer spending. With cheap gas and easy financing, this makes sense (even if Millennials are supposed to the generation that doesn’t drive).
What worries me is that I keep seeing new retail development, especially organic grocery stores (Earth Fare, Sprouts, Whole Foods) and restaurants (Millennials don’t cook, either). Restaurants don’t figure to do well as a group if consumers are hamstringing their disposable income by buying cars. Indeed, by some measures I’ve seen, Atlanta is already over-retailed.
Office: Will we finally see new development?
With employment figures reaching pre-recession levels and office rents rising, we will see some new office buildings come out of the ground in 2016, but with higher employee density and greater concern for commuting time. Traffic is Atlanta’s Achilles’ Heel—our streets just weren’t designed for the number of cars we’re putting on them. I’m expecting most new office development to be transit-oriented, in particular in Buckhead and Sandy Springs, which have MARTA access and plenty of retail, not to mention all those new apartments.
Also, as with industrial, older close-in office properties are being demolished in favor of new, high-density developments. Where will theses tenants—mostly small ones— go? Many will go to Starbucks or new shared office concepts like ROAM. With new technology some just don’t need a permanent office anymore.