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On October 30, 2007, Zak Freiwald of Smith & Howard attended a meeting of the Atlanta chapter of the Urban Land Institute (ULI), a global organization for real estate professionals. The subject of the meeting was a presentation of the ULI’s Emerging Trends in Real Estate study followed by a panel discussion on trends and issues specific to the Atlanta real estate market.
   
Following is an article by Freiwald summarizing the major topics and trends discussed.

Emerging Trends in Real Estate Report

The Emerging Trends report is compiled from surveys and interviews of about 600 individuals from development companies, builders, banks, institutional investment managers, and real estate service firms. While the findings are very diverse with respect to different metropolitan markets, most of the study’s findings crystallized around a single key point: changing credit markets.

It should be no secret at this point that credit markets have become much tighter in the wake of the sub-prime crisis. Part of this has manifested in the form of higher interest rates on development and permanent loans. In addition, lenders have become more selective in lending on real estate. There are some segments of the real estate market where the shortening supply of credit is more noticeable than others. For example, new condominium projects have fallen out favor with lenders. There is also an increased reluctance to finance suburban office developments. 

The tighter credit market is reducing developers’ ability to use debt financing to leverage large projects. As a result, developers are increasingly turning to institutional equity financing such as REITs, pension funds, and private equity funds. Now, more than ever, these investment vehicles are changing the way large projects are developed and owned. Foreign equity investors still are major sources of real estate financing. That said, interviewees felt that there is an increasing sentiment among foreign investors that the U.S. market is overpriced and richer returns could be found elsewhere.

The report also compiled the respondents’ relative confidence in various metropolitan markets. Seattle, San Francisco and New York City were in the top three for most segments, i.e. commercial, multifamily residential, hotel, etc., while Detroit, New Orleans and Cleveland were ranked lowest for most market segments. Respondents ranked Atlanta approximately in the middle. On one hand, the Atlanta market was described as “chronically overbuilt” with excess capacity being added at a heated pace. However, Atlanta’s successful in-town development spree and its long-standing position as a global transportation hub have kept the respondents cautiously optimistic about the city’s future.

Atlanta Emerging Trends

The panel, featuring AJC business columnist Maria Saporta; Stephen Whisenant, CEO of Madison Retail; LaNorris Nixon, Vice President of Russell New Urban Development; and Lance Patterson, COO of Barry Real Estate Companies, focused its discussion on real estate issues relevant to the Atlanta market.

In addition to the shortening supply of cheap credit, the panel identified a number of other issues that could affect the development juggernaut of the Atlanta real estate market. Most of these related to civil infrastructure and local governments.

Transportation was seen as a pivotal long-term issue for the metro area. The shortfalls of the MARTA system and the unsustainable nature of Atlanta’s current car culture were cited as threats to suburban development. The panel did not see that there were any viable regional transportation plans in the pipeline to remedy this situation. As such, urban and mixed-use projects were identified as a promising alternative to suburban development.  The panel seemed very optimistic about proposed in-town transit projects such as the Beltline and the Peachtree Street trolley. These limited scope projects were also viewed as anchors for neighboring future development, particularly residential and retail.

In addition, water shortages and deficient schools were identified as limitations to development. Water shortages were viewed as primarily an issue for industrial and suburban development. The poor performance of City of Atlanta schools was viewed as a potential threat to the trend of the middle class returning to some parts of the city.

The panel members shared some of their varying experiences with obtaining municipalities’ cooperation in their projects. On matters of zoning variances, density, incentives and infrastructure, they reported a range of response from local government — from total collaboration to outright combativeness. However, no one on the panel was willing to say which governments were combative. 

The key takeaways from the event were that

• the reduced supply of cheap debt is changing which projects are financed and how they are financed; and,
• Atlanta’s lack of suburban transportation infrastructure continues to persuade businesses and homeowners to consider in-town locations. 

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