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

* Corporate layoffs. Major corporations such as Coca-Cola, Cingular Wireless and BellSouth have trimmed payrolls in an effort to sustain profits during a period of sluggish sales growth.

The impact of low interest rates

The Federal Reserve's low-interest-rate policy has also had a significant impact. Many property owners have coped with the financial strain of falling rentals by refinancing to low-interest, adjustable-rate debt. When short-term rates do begin to rise, however, some property owners may experience renewed pressure to make payments on their loans.

The Southeast's once-booming multifamily housing sector has had an especially difficult time adjusting (see the sidebar below). The lowest mortgage rates in 40 years have bolstered the single-family residential market, enabling first-time home buyers to qualify for mortgages. This trend has prompted an exodus of apartment tenants across the South-east because even low- and moderate-income residents are able to afford homes of their own.

A surplus of space also has developed in the Atlanta area's low-profile industrial sector, which is typically less susceptible to real estate cycles. Corporate cutbacks have taken a toll on Atlanta-area warehouses and factories; industrial vacancy rates jumped from 7 percent in early 2001 to more than 17 percent in the first quarter of 2003. Other Southeastern cities report similar patterns with continued consolidation, downsizing and the migration of operations to low-wage labor markets overseas.

Smoother sailing ahead?

The Atlanta real estate market will eventually recover. The question, though, is when and how. Egbert Perry, a member of the Atlanta Fed board of directors and chairman and CEO of Integral Group, an Atlanta firm that develops apartments, envisions an expansion of jobs in the area but nothing spectacular in the foreseeable future. His forecast: "Trickle-along growth, then a slow ramp-up."

Real estate development is not for the faint of heart, and optimism runs deep in Atlanta. Leithead envisions short-term uncertainty and inertia, followed by a rapid, steady upturn as the area's corporate executives realize that they need to hire more employees to grow and become more profitable. Once that happens, empty office space will start to fill up. "Irrational exuberance has been replaced by irrational pessimism," he said. "But the market will even out in the long run."

RELATED ARTICLE: Mostly for Florida office market; other areas cope with overbuilding.

Commercial real estate in Florida depends on a broad range of industries--tourism, support services, small businesses and investment from Latin America. Although some of these sectors have faltered, key real estate markets across the state are prospering, with the trend improving in recent quarters.

"Florida has been stronger than the nation because of its service industry focus," said John Robertson, an officer in the Atlanta Fed's research department. "There has been a lot of migration into Florida. Our best guess is that this trend will continue." For a number of years Florida's population has been growing at twice the rate of the rest of the country, driven significantly by migration from Latin America and by retirees.