Glut of office space plagues Atlanta as tenants disappear: corporate downsizing has taken a toll on office landlords across the Southeast. But the overabundance of office space, created by significant job losses and overbuilding, has been particularly severe in Atlanta, the region's largest commercial real estate market - Regional Focus - commercial real estate development and investment

EconSouth, Summer, 2003

How is the present market different from these difficult past episodes? It's too early to write a book about it, but it's likely the story will be different from Tom Wolfe's A Man in Full, a 1998 novel about the fall of high-living Atlanta developer Charlie Croker in the early 1990s. In Wolfe's story, the fictitious Croker battles lenders for control of his largely vacant real estate buildings in Atlanta. Eventually, he loses control of his real estate--along with his "trophy wife" and lavish lifestyle.

Perhaps a better symbol for today's battered real estate market is Bernard Ebbers. While he was chairman of WorldCom, the company was accused of inflating its financial performance and stock price. After the story broke about WorldCom's actual performance, the company declared bankruptcy and laid off thousands of workers. In the process, large chunks of empty office space became available, much of which was located at the company's Mississippi headquarters and major regional offices such as Atlanta.

The drop in demand for space has been painful for developers, who say they were responding only to what appeared to be a legitimate need for office supply. "We didn't overbuild the market--we over-leased it," said Tad Leithead, senior vice president of Cousins Properties in Atlanta. "The problem was an unrealistic expectation among tenants for the amount of space that they would need."

Recovering from a "perfect storm"

Much of the development has been funded through publicly traded real estate investment trusts (REITs). For its part, the banking industry has probably mitigated the excess space problem somewhat by tightening underwriting standards. Savings and loans are not a major factor in the market as they were in the 1980s, and tax-driven deals are less of a problem now than they were before the IRS code was revised in 1986. Today, underwriters typically refuse to lend more than 70 percent of the value of the project, compared with 100 percent 15 years ago.

But even with stricter guidelines, the real estate market may be in a difficult position. How could this happen? Leithead describes an unforeseen "perfect storm" that struck the Atlanta economy with particular vengeance. A convergence of multiple forces took the area by surprise, pounding the areas office, industrial and multifamily real estate sectors while leaving the residential market (at least for now) relatively unscathed.

Elements of this storm include

* The collapse of demand from dot-com tenants. Firms such as eTour leased hundreds of thousands of square feet in Atlanta. Many of these companies are now out of business or significantly downsized.

* The telecom meltdown. Atlanta was a major center for telecom firms that attracted a great deal of investment during the 1990s. For example, WorldCom left behind a swath of office space in north-west Atlanta after the company declared bankruptcy in 2002.

* The terrorist attacks of Sept. 11, 2001. Atlanta is a major destination for business travel and conventions, two industries that have been hit hard following the attacks. Cutbacks in the airline industry, particularly Atlanta-based Delta Air Lines, also have hurt the area economy.