> FYI, For those of you who can stomach this, here you go.
>
> Here are some personal insights from an attendee (not me) at ULI Meeting in San Francisco November 2009
>
> =====================
>
> "This week I attended the Urban Land fall conference. ULI is the top real estate industry group in the world. All the most senior people in the industry.
>
> 1. Not one expert was willing to predict what things will look like in 3 years other than they think it will be better
>
> 2. One top economist said if you are a developer find another career for the next 3 years-there is nothing to do and it may be 5 years
>
> 3. Recovery will be slow. Unemployment will not drop back to more normal levels until 2014. First they will bring back people on 4 day weeks to 5 days, then they will increase hours form the average 33 hours now, then part timers will become more full time, then they will start to hire.
>
> 4. Real estate values are down generally 40% and there is a huge need for value reset to occur
>
> 5. Nobody knows what debt will look like when it returns other than it will be far more conservative. Nobody knows what securitization will be when it does return
>
> 6. The rating agencies will operate differently. There is a discussion among some of us that there needs to be an agency probably of Treasury that collects fees of some sort from issuers each time there is an issuance of debt to be rated and that agency will then hire a rating agency to be a analyst firm to determine the quality of the issue. There will definitely not be a continuation of investment bankers hiring the raters and paying them directly. There needs to be a rule that the I bankers cannot talk to the raters. There was far to much threats of withholding fees, and other inducements to the raters before making ratings about as accurate as appraisals which were also paid for by I bankers who needed high appraisals to justify the over leveraging.
>
> 7. Housing in some bad markets is still bad and the first time buyer credit is making it a somewhat phony market. Phoenix has 45,000 housing lots so there is a literal lifetime supply of lots. Land prices in Phoenix, S CA and other markets are 50% of the cost of the infrastructure installed on finished lots. The land has zero or negative value. In most areas it will be at least 5 years before any of this land will get built out in any quantity.
>
> There are still 2-3 million too many houses in the US.
>
> 8. This time is really very different than any recession in the past
>
> 9. The US is no longer the world economic leader and will not lead the world out of this mess.
>
> 10. Real estate will once again be an investment and not the trading vehicle it became which is what led to this crisis.
>
> 11. We will go back to financing real estate with long term debt, and not the short term floating rate debt used to all a quick flip.
>
> 12. The Internet completely changed unemployment trends. Instead of just pumping up the US economy and bringing back production jobs, the Internet has caused the entire world to be competitors for many jobs in the US. It ranges from call centers to research, financial analysis, medical research, and on and on. This may be one of the most historic changes in history and one everyone needs to be aware of. It likely means wages in the US will be reduced below where they might have been were it not for this competition.
>
> As several economists put it, the young in China and India and other Asian countries are hungry to get ahead and enjoy the good life, while US kids feel entitled and poorly educated. Those of us who built businesses were very hungry. Today there are still some like us, but many are too comfortable and unwilling to really sacrifice to make it like we were. The Asians want to learn. Our young people think they already know it- whatever it happens to be.
>
> 13. The 3rd Q GDP number is inflated by clunkers home buyer subsidy etc.
>
> Growth next year will be more like 1%-2% in the first part of the year.
>
> 14 Inflation will return in 3-4 years
>
> 15. US corporations are sitting on record cash balances way beyond any they ever had. They will be doing more acquisitions.
>
> 16. The best market in the US is Washington DC. For obvious reasons
>
> 17. Investors fled real estate completely fled real estate in the early 90's. This time they see the long tern opportunity to create wealth and will be back as soon as the opportunity to buy appears
>
> 18 There is an enormous amount of cash on the sidelines
>
>
>
> 19. The Fed is intentionally holding rates at zero to try to force investors to invest in longer term riskier assets instead of collecting nothing on money market or CD's.
>
> 20 The banks are still weak.
>
> 21 All values are still dropping and we have only gotten to 80% of the drop so far. Office and retail are only 80% there, industrial is only 60% and will be hurt by further inventory liquidation and lower levels carried going forward. Rents are only 75% of the way to the bottom.
>
> 22. In the 90's it was easier to fix the problem because the damage was much more confined to a small number of large new buildings which were revalued and then rerented. Now the damage is widespread and covers a lot of older buildings so it will take a lot longer to solve. Quality really matter now. The best buildings will return, a lot of others will struggle.
>
> 23. Office vacancy will hit 18.6% nationally, retail 23%, and multifamily 8%.
>
> 24. The unwind of the massive Fed stimulus is critical to how it goes. Everyone thinks Bernanke is great but nobody ever did this before -it is truly uncharted waters. Then there is the politics and what will the rest of the world do.
>
> 25. As you will read below there will not be the massive foreclosure and asset disposal we all expected. The lenders are going to hold on. When assets do come to market prices will be higher than they should be due to very few deals being chased by massive dollars. There is already evidence of this in the multifamily market.
>
> 26. Mobile phones, and other devices are now becoming all sorts of tools and multiple use devices. Social networking is growing faster than anything anyone can imagine. The growth rates are beyond comprehension. This is where everything in the world is going from ordering food or reserving a car on Zip Car, to reading the news or anything. If you are over 30 you can't grasp what is happening and how fast. The growth in usage is by tens of millions in months, and it is worldwide. You can't get your mind around this. There has never been anything in modern times that even is remotely like this. The growth rate makes the growth in TV usage look like it was glacial. This is the biggest transformation of how the world functions in maybe hundreds of years. You need to learn all about this or get run over.
>
> Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.
>
> Just NOT principal reduction. This is just like they are doing in housing.
>
> Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can't reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on. When I pressed the issue of political interference she said -what do you want us to do, bankrupt all the banks.
>
> That is the choice.
>
> What does this tell you?
>
> A. The problem is going to take much longer to solve than it should,
>
> B. The banks are still very weak, so lending will not return anytime soon,
>
> C. A massive refi problem is getting deferred to 2013-2015.
>
> D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.
>
>
> I think I captured a lot of what was said in various panels and conversations. We have a long way to go and the government is making it harder to fix the problem."

From NREI and written by By Sibley Fleming

With the U.S. unemployment rate now projected by Moody’s to peak at 10.1% by the end of 2009 and credit still hard for investors to secure, there was little to cheer about during a quarterly media briefing Wednesday on the capital markets conducted by real estate research firm Reis.


In short, vacancies in commercial real estate are likely to increase over the next 18 to 24 months with positive rent growth absent from the scene until 2012, or even later. “Investors will have to think longer about hold periods,” Reis director of research Victor Calanog concluded, “and give up aspirations of a quick flip at triple the price in two to four years.”


Reis forecasts that the national office vacancy rate will reach 18% by year-end, the highest level since 1992, when overbuilding in the sector was rampant. The national office vacancy hit 16.3% in the first quarter, up from 15.5% in the previous quarter.


Meanwhile, transaction volume measured across property types dropped 40.2% in the first quarter compared with the fourth quarter of 2008, and fell 74.2% year-over-year.


In contrast to the 40.2% drop in transaction volume across all property types, and 70% in regional rears for industrial demand, office fared a bit better. By dollar volume, the value of the deals fell by just 7% in the first quarter. However, when excluding distressed sales — the John Hancock Tower in Boston, the former Bertelsmann building at 1540 Broadway and The New York Times headquarters and 10 Universal City Plaza in San Fernando Valley, Calif. — dollar volume actually dropped by 48%, not 7%.


The drop-off in deal volume is much more pronounced in central business districts, where transactions occurred in just 11 of the 79 markets. In contrast, 40 out of 79 markets in non-CBD locations recorded office property deals.


In short, investors have less tolerance in the current market to pay for relatively more expensive properties, said Calanog. For instance, 2008 transaction data shows that CBD office properties traded for $366 per sq. ft. while non-CBD properties changed hands for $193 per sq. ft.


On a positive note, the price per square foot in the office sector increased 4.8% year-over-year, with three out of five regions registering positive growth, according to Reis. “It would be unwise to extrapolate these results across time and call a recovery, given continuing uncertainty in financial markets and near-term expectations of performance declines in the office sector,” said Calanog


The national apartment vacancy rate is less alarming, but is still projected to peak at 8%, a level not seen since the late 1980s, according to Reis. The average capitalization rate, or initial return to the investor based on the purchase price, for multifamily hit 7.6% at the end of the first quarter nationally. That average includes deals with cap rates ranging from 10.8% to approximately 5% for gateway cities such as New York and San Francisco.


While the decline in transaction volume in the apartment sector across all regions is in line with the office sector’s 60% to 80% drop, Calanog noted that the apartment sector likely will recover sooner than the office sector. “With multifamily properties transacting at even lower prices this quarter, and possible recovery by 2010,” he says, “investors willing to take the risk may want to use the remainder of 2009 to look for opportunities.”


In the retail sector, the news was grim for sellers. Reis projects that the average vacancy rate for neighborhood and community centers will rise to 10.8% by year’s end, 11.8% in 2010 and more than 12% in 2012.

In the first quarter, retail property cap rates ranged from 4.1% to 11.5% with Midwest neighborhood centers yielding an average cap rate of 9.9% Nationally prices fell 20% in the first quarter from $208 to $167 per sq. ft.


“The Southwest is the only region that registered positive growth [in sales prices],” said Calanog, “but once again we need to take this with a grain of salt.” The caveat is that only 64 retail properties changed hands in all of 2008 in the Southwest, and only nine traded in the first quarter of this year. By dollar volume, the decline in deals was more than 70% year-over-year.


With the dearth of transactions, the federal government has introduced new programs such as the Term Asset-Backed Securities Loan Facility, or TALF, to ease liquidity and stimulate investment in commercial mortgage-backed securities.


“Firms may either benefit from TALF via debt financing, or they might actually be able to raise money through equity offerings,” said Calanog. “But will they use that money to invest in income-generating assets, or will they pay down debt? If it’s the latter, then is deleveraging more about lack of faith in the recovery of credit markets in the near-term?”

Commercial property sales by dollar volume slumped 50% in the first quarter from the fourth quarter of 2008 as gross domestic product (GDP) contracted 6.1%. That’s according to a preliminary estimate by New York-based real estate research firm Reis. Analysts had expected GDP to contract 4.6% on an annualized basis.


According to the U.S. Commerce Department, investment in nonresidential structures — primarily commercial real estate investment — decreased 44.2% on a quarter-over-quarter basis.


“There are buildings transacting, but the drop-off is quite significant,” says Victor Calanog, chief economist for Reis. “It is the lowest volume on record since Reis began tracking transactions in 2003.”


Retail property sales fell 49% in the first quarter over the fourth quarter while apartments fell 49% and industrial properties sank 61%. In stark contrast, the office sector saw a decline of just 5.3%.


“On the surface there was only a 5.3% decrease in dollar volume for office transactions from the fourth quarter if one excluded the foreclosure auctions of the John Hancock Tower, the New York Times Building and a couple of other large transactions, the drop-off would be closer to 50%, too,” Calanog explains.


The large distressed asset sales that bolstered first-quarter office transactions include the $660 million auction of the John Hancock Tower in Boston; the $225 million sale of the New York Times Building; the $304.8 million sale of 10 Universal City Plaza in Universal City, Calif.; and the $355 million sale of the Bertelsmann Building in New York.


In addition to the sharp decline in nonresidential structures, the Commerce Department reported a 30% plunge in U.S. exports as well as a 34.1% decrease in imports.


In the industrial property sector, construction activity dropped from roughly 72 million sq. ft. in the fourth quarter to approximately 39 million sq. ft. in the first quarter, according to Robert Bach, chief economist for Santa Ana, Calif.-based Grubb & Ellis.


“I think construction activity will continue to decline,” says Bach. “The thing that struck me is how quickly industrial construction is declining. It’s just plummeting to levels lower than we saw in the last recession.”


One bright spot in the GDP figures, however, was consumer spending, which rose 2.2% in the first quarter after falling 4.3% in the fourth quarter of 2008. “It looks like there are some signs that consumers are coming back and I think that’s a positive,” Bach notes. “It also suggests that the stimulus package with the tax cuts is having some effect.”


Calanog disagrees. “I don’t know if you want to hang your hat on glimmers of hope or stabilization for [consumer spending],” he says. “If you drill down into it and take a look at what people are spending their money on, it’s really the purchases of durable goods.”

Spending on durable goods rose 9.4% in the first quarter after falling 22.1% in the fourth quarter. The increase following the sharp decline could be an indication of pent-up demand, says Calanog. Durable goods include necessities, such as refrigerators, which are seldom replaced. Meanwhile, non-durable goods, a greater reflection of discretionary

Demand for warehouse and distribution, manufacturing and flex space plunged in the first quarter -- and economic data analyzed by King Industrial Realty suggests that the descent will continue for some time. In the first three months, the amount of negative net absorption of U.S. industrial real estate spiked to its highest level since the dot-com bubble burst in 2000, and the national vacancy rate is poised to move into double digits for the first time since the mid-1990s, two recessions ago.

The U.S. industrial vacancy rate hopped from 8.9% at the end of 2008 to 9.35% in the first three months of 2009. Tenants, meanwhile, gave back a whopping 48 million square feet of industrial space in the first three months -- the largest negative absorption posted in one quarter since 2000, according to King Industrial's Point of Veiw First Quarter 2009.

And this is expected to be just the beginning. Industrial production, consumer spending and imports/exports are all down sharply. Employers have shed 5.1 million jobs since the end of 2007, including 2.1 million in first-quarter 2009 alone -- far higher job losses than the previous recession. CoStar Group's analysis projects that as a result, 100 million square feet of industrial space will be returned to the market, pushing the national vacancy rate to 11.2% by the end of next year.

That said, the situation could be much worse for industrial property professionals -- they could be office landlords or brokers.

"The vacancy rate is higher than we saw during the dot-com era, but given the size of the industrial market, it's not an alarming vacancy rate," said Jay Spivey, senior director of research and analytics for Bethesda, MD-based CoStar, who delivered the industrial report and outlook to clients in a webinar presentation this week. CoStar tracks almost 22 billion square feet of industrial space making up about half of the nation's commercial real estate.

"Steep job losses and the significant decline in home prices have significantly reduced demand for goods, and as a result, goods movement," said Alan Pontius, senior vice president and managing director with Marcus & Millichap Real Estate Investment Services. "While there were markets in the dot-com bust that recorded very weak fundamentals, including San Francisco, Austin and Boston, the current downturn is far more widespread throughout the nation."

The weakness in trade flows, which directly affects supply chains, has been especially severe, said Peter P. Kozel, senior managing director and chief of research with FirstService Williams.

"The combined total of imports plus exports declined by 8.41% from the fourth-quarter of 2007 through fourth-quarter 2008, and the largest decline in the 2001-2002 period was 7.69%," Kozel tells CoStar Advisor. "The drivers for the industrial sector are profoundly weaker now than they were [seven or eight years ago]."

The market is not without a couple of bright spots, however -- and one of them is the sensible supply of new inventory, which remains in check relative to the great industrial building booms of the 1980s and ‘90s. Although pre-leasing of new projects is weaker, developers delivered only 34 million square feet of space in the first quarter -- a mere 0.1% of total industrial inventory, Spivey noted.

"Things have throttled down dramatically. We’ve gone from 55 million to 38 million square feet under construction; that is completely unprecedented," Spivey said. Even after the dot-com debacle and subsequent recession, there was never less than 88 million square feet under construction in any given quarter, he said.


When will construction pick up? Not any time soon -- the amount of available space on the market, much of it at reasonable rates, will first have to be absorbed before most tenants will consider paying a premium for new space, Douglas P. Frye, CEO and chairman of Colliers International, told Advisor.


Sales: Activity Way Down, Prices to Follow

Like other investments hurt by lack of access to capital, industrial sales volume is down about 83% over the last 18 months, Spivey said. Properties are now sitting on the seller's block for an average of 370 days, compared with 288 days in mid-2007, during the last gasp of the previous market boom.

Spivey believes activity probably can't and won't fall much further. Michael J. Ferrara, an investment sales specialist with Sutton & Edwards Inc. in Lake Success, NY, saw a change in investor behavior beginning at the end of last year.

"Back in November and December, most of the investors I spoke to were just sitting on the sidelines and telling me to follow up with them in three to six months," Ferrara said. "Now, these same investors are telling me to send them the information and seem to be getting their feet back in the water."

Cap rates, compressed during the mid-2000s price runup to a decade-low 5.8% a year ago, have since risen 130 basis point to about 7.1%. CoStar projects that cap rates could rise a total of 400-500 basis points over the next couple of years.

One bright spot for the industrial sales market so far is that average per-square-foot prices have eroded only about 17% from their first-quarter 2007 high -- relatively stable compared with the 50% drops seen in the office market, Spivey said. "We’re still well above the historical average in terms of prices."

The down side of that: prices still have a ways to fall, as much as 60% over the next two to three years. "If we can get to a bottom in terms of prices, we’ll start to see activity come back -- but not until we get to that bottom," Spivey said.

The bottom has so far eluded risk-adverse buyers and sellers in the last few months. Debt capital is more difficult to come by, particularly on larger deals, as lenders have heightened scrutiny on the quality of both the property and the borrower, and raised debt-service coverage requirements, Marcus & Millichap's Pontius said. Some buyers are looking for distress fire sales that have yet to materialize. Many owners, meanwhile, are electing to try and ride out the downturn rather than sell at depressing prices. Eventually, however, "buyers will win this chicken fight," Sutton & Edwards Inc.'s Ferrara predicts.

"When you have that huge gap where the seller won’t go above a 7% cap and a buyer won’t go below an 8% cap, the result is a freeze in executed transactions," Ferrara said. "However, eventually the sellers are going to have to raise the cap rate once they realize they have no choice but to sell or have the bank take over."


"We believe this is just beginning. Rents are eroding well below pro forma numbers and vacancy rates are going up. Without job growth, we will not see a bottom. And even if the market is getting close to a price bottom, it is not clear that the market will recover from that bottom anytime soon."


Absorption Goes Negative

Gross leasing activity dropped significantly and across all geographic markets to 82 million square feet in the first quarter -- about half the volume of the same period a year ago, according to King Data. Negative net absorption skyrocketed.

"So far, the three quarters of negative absorption we’ve seen recently is cumulatively more than we saw during the whole dot-com [collapse] back in 2000," Spivey said.

As dismal as those figures are, they're better than the numbers coming out of the office sector, which hasn’t yet given back space proportionally to the massive job losses sweeping the nation's financial industry. Those job losses suggest that the office sector should be posting 100 million square feet of negative absorption at present rather than the minus-20 million square feet reported last quarter, Spivey said.

The rising number of property listings by owners on CoStar also reflects the softening demand. If the current pace holds, almost 1 million new listings will be added this year across all property types, including nearly 48,000 industrial listings in the first three months alone totaling 640 million square feet -- the vast majority made up of relet and sublet space shed by tenants. The top five owners of industrial property alone -- ProLogis, First Industrial Realty Trust, AMB Property Corp. and RREEF America LLC and Duke Realty -- are listing a total of about 120 million square feet.

Colliers' Frye said anecdotally that receptionists in the company's Phoenix, San Diego, Los Angeles and Seattle offices report a higher level of inbound phone traffic recently, while industrial agents are reporting an uptick in prospective tenants looking at properties, taking presentations and making offers.

The industrial vacancy rate has jumped from about 8% to 9.35% in just a year. But as ominous as that number is, the amount of total space available and actively being marketed on CoStar -- some of it vacant, some of it occupied but soon to be empty -- is rising even faster, now standing at 18%. The amount of sublet space being marketed is much greater than the amount that’s actually vacant, suggesting that tenants will exit even more space in coming quarters, Spivey said. Properties are sitting on the rental market an average of 400 days before they’re leased, compared to 345 days a year ago.

Among the nation's 20 largest industrial markets, the Inland Empire region of Southern California saw its year-over-year vacancy rate jump 400 basis points to 12.3% in the first quarter as developers delivered another 3.3 million square feet. Long Island, NY, edged out Los Angeles as the market with the tightest vacancy rate at 4.2%.

Property Tour to Close in two weeks! Yes, the economy is weak, but there are deals to be had. Wilson Covington repersenting an undisclosed investor has just purchased the former Greenleaf landscape facility. This 6,000 square foot facility on 1.4 acres is a true diamond. Now for Lease, this facility offer fenced outside storage and easy access to I-20. Charles Laughridge represented the seller Sigman Gutters in the sale.

There are many factors that can increase the risk of overcharges to a tenant. Most of these relate more to the nature of the transactions than to specific behavior of a landlord, but nevertheless, if a location is in a higher risk category, a tenant would be well-served by investigating the charges with a higher level of scrutiny.

Complex leases. These locations are more prone to error because of the number of moving parts within the documents themselves. Locations can be complex by virtue of a number of factors, including having multiple spaces under different amendments or leases in the building, the presence of multiple expense pools (common for mixed use properties), and having highly negotiated inclusion and exclusion definitions in the operating expense language (such as gross-up language, capital expenditure language, etc.).
A location that tests positive for ANY of these risk factors should be evaluated further to determine if the charges were calculated correctly.

Larger / more expensive leases: Although all leases should be subject to routine reviews, as a rule of thumb, all leases over 30,000 square feet should be examined automatically because even small errors can be significant when translated to cumulative liability. Individual expense line items that are more than 15% higher than similar buildings in the same market should also be investigated to determine the reasons for the variance. Leases with significant sundry charges such as overtime HVAC, cleaning or freight elevator use should also be examined closely for those issues.

Leases with significant or unexpectedly high costs: Specific expenses should always be examined when they fluctuate unexpectedly or when they have risen faster than inflation or when they deviate from plan. These abnormalities can be indications that the landlord is not being consistent in its treatment of expenses or is misinterpreting the lease. In addition, leases in which total expenses have risen by more than $0.45 per foot in any one year should be automatically examined.

Leases in buildings where ownership has changed: Changes in ownership often bring changes in methods of accounting and management philosophies. Depending on the type of lease (gross, modified gross, net), these changes can have unintended adverse effects on a tenant’s charges.

Locations where landlord behavior creates suspicion: When a landlord does not reconcile promptly after the close of the year or where prior audits have identified overcharges, the costs should be looked at closely every year. In addition, landlords who do not run their buildings well (slow on maintenance issues, loose controls) are likely to be less diligent in billing their pass-throughs.

Leases where use of the space or physical conditions may impact costs: These include leases in which the tenant has not fully occupied its space or separately contracts for some of its own services. In addition, leases in buildings where construction or capital projects have been taking place during the base year or any of the operating years should always be investigated. Also, even where construction predates the lease term, such construction may impact taxes and other costs that generally lag the activity.

Leases with special provisions: Leases should be looked at whenever certain circumstances are present. For example, leases with new base years should always be examined as soon as the first operating year’s bill is received because these base years determine the tenant's liability for every year of the lease term. In addition, real estate taxes should always be examined if the property is subject to special tax incentive or tax limitation programs (such as NYC’s ICIP program or California’s Proposition 13) because these programs can distort the consistency and treatment of the tax pass-through provisions. Also, electric rent inclusion, direct utilities, and CPI, Porters’ Wage or other indices should be checked as soon as the bills are received because each has nuances that can easily result in significant overcharges.

Leases subleased out to third parties: Because these leases have two sets of expenses that can have opposite impacts on a tenant, the respective obligations must be mapped out to determine if the charges from the landlord are being properly synchronized with the obligations imposed on the subtenant. A change to a lease’s operating year can have an impact on a subtenant’s base year that can augment (positively or negatively) the amounts payable by the subtenant for the life of the sublease.

Leases within 2 years of termination or renewal: Leases that are close to termination should be looked at before the tenant’s financial leverage is lost. Landlords are more likely to make adjustments if they hope the tenant will renew and/or if significant amounts of rent have yet to be paid. Also, if a lease is approaching renewal, an audit can reveal weaknesses in lease language that can be corrected during negotiations.

Conclusion

These factors can greatly increase the risk of overcharges to a tenant and the presence of any of them should serve as an indication that a more intensive review should be performed.

Good Riddance

The curtain crashed down on the Atlanta Industrial market in the fourth quarter, bringing to an end a tumultuous 2008. A combination of overwhelming tenant turnover and sluggish leasing activity led to unprecedented negative net absorption and further fueled economic uncertainty to finish the year.

After an encouraging third quarter, Atlanta’s market fundamentals appeared to be heading in the right direction. However, a surge in tenant turnover during the fourth quarter erased this progression and resulted in -4,186,752 square feet of negative net absorption. This represents the worst single quarter for absorption since King Industrial Realty began tracking the Atlanta Industrial market more than 25years ago.

History demonstrates that tenant turnover, rather than lack of activity, is primarily responsible for Atlanta’s problems. Atlanta recorded 8,491,524 square feet of activity this quarter. In comparison, the fourth quarter of 2004 recorded virtually the same activity of 8,360,221 square feet. However, in contrast to 2008, the Atlanta Industrial market in 2004 was able to convert a remarkable 3,301,992 square feet of this productivity into positive net absorption, the difference being tenant retention.

Ten out of the 12 metro Atlanta submarkets recorded negative net absorption in the fourth quarter. In particular, the I-85 North distribution market concluded the year on an erratic note. On the one hand, it led all metro Atlanta submarkets with 1,861,232 square feet of activity in the fourth quarter; yet on the other hand, it had the dubious distinction of leading all metro Atlanta submarkets with -855,274 square feet of negative net absorption. The exceptions to the rule were the Airport submarket, which managed to record 344,851 square feet of positive net absorption and the Peachtree City submarket, with a modest 3,473 square feet of positive net absorption.

Meanwhile, in conjunction with this turmoil, Atlanta’s availability rate jumped one percent to 17.4 percent in the fourth quarter. Currently, first generation space comprises only 15 percent of the available space in metro Atlanta, while two years ago it accounted for 25.2 percent of the available space - evidence that developers are cautious about breaking ground on new spec construction projects at this time. In fact, 53.5 percent of the new construction projects launched in metro Atlanta over the last year were build-to-suit projects.

It has been a difficult year for the Atlanta Industrial market and it is uncertain what the future may hold. Hopefully though, the dramatic reductions in energy prices and low interest rates will stimulate the economy and help us get back on track in 2009.

Wilson Covington

Click on the Magazine to view the new issue

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All 1 Services Inc. purchase the 16,711 Sq.Ft. former Plymart building at 7468 Veterans Memorial Hwy in Douglasville. Wilson Covington represented Plymart in the sale. Brad Bays of King Industrial Realty represented the purchaser. All 1 Service, Inc. is a multi faceted service company that has been meeting the janitorial, landscaping, vending and office refreshment needs of a wide range of industries for over 20 years. The purchase of the new facility will bring all branch of the company under one roof.