Atlanta Report: Not So Peachy Anymore?

Atlanta is active for now, and contractors are busy, but signs of trouble exist.

By Debra Wood

Despite a slowing economy, difficulties in commercial project financing and rising material prices, Atlanta-metro contractors are staying upbeat for now, with healthy backlogs and a positive short-term outlook through the rest of this year.

However, 2009 is a major question mark.

“We’re still busy through this year and will carry a healthy backlog through 2009,” says Trey Sanders, general manager for the Atlanta office of Brasfield & Gorrie in Kennesaw. But he adds that new work likely will be harder to find in 2009, and fees will become more competitive.

Paul Wallace, senior vice president of business development for Bovis Lend Lease in Atlanta, agrees, saying in an e-mail that competition will increase as “companies begin exploring new markets to replace revenues from down markets that they have historically specialized in.”

Competition is currently increasing more on public jobs than private work, adds Bill Pinto, president of Hardin Construction in Atlanta, also via e-mail.

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“Pressure on profits is apparent, [with] more contractors chasing fewer projects,” he says. “The overall marketplace will be flat, at best, in 2009.”

McGraw-Hill Construction, publisher of Southeast Construction, also anticipates an essentially flat nonresidential construction market in metro Atlanta through 2009. While new starts on office buildings, hotels, high-rise condos and retails will be down, other institutional markets, such as health care and education, should offset these declines, McGraw-Hill predicts.

Overall, McGraw-Hill expects nonresidential starts for both 2008 and 2009, respectively, to total about $5.6 billion.

McGraw-Hill’s statistics for the first five months of the year showed positive growth in nonresidential construction. (In fact, it was the top nonresidential market in the nation, through the first five months of the year.) But in June, nonresidential starts fell by 37% compared to June 2007, edging the metro total for the year into negative territory for the first time. As a result, Atlanta’s nonresidential market stood at 4% below 2007’s pace at the end of June.

Financing concerns

As with the rest of the country, material costs are up and project financing has tightened considerably.

“The run-up in prices has been difficult for owners to swallow,” says Tom Raney, senior vice president of marketing for contractor R. J. Griffin & Co. of Atlanta. “The owners are facing a tougher market and they are dealing with construction cost escalation at the same time. Project financing is much harder to secure, and the cost of available loans is prohibitive.”

Bill Anderson, executive director of the Georgia Chapter of the Associated Builders and Contractors in Atlanta, agrees. “There is just not as much money available, and what’s there is much tighter,” he adds.

Pinto says projects with a solid pro forma “still have a good chance of starting, although [they are] experiencing extended predevelopment and preconstruction time periods to allow for financing to be finalized.”

And Wallace adds: “Continuation of problems in banking institutions will make construction financing difficult to obtain. On large projects, those over $100 million, developers will need to have a successful track record in their chosen market, have a long-standing relationship with a bank and put up more equity than in the past to secure a loan.”

Developers have placed some projects on hold, including some elements of the Streets of Buckhead, an eventual 2-million-sq-ft project. Earlier this year, developer Ben Carter Properties of Atlanta eliminated a 300,000-sq-ft office tower and 50,000 sq ft of retail shops from the project, Scott Higley, vice president of marketing for Ben Carter, says in an e-mail.

Balfour Beatty Construction in Atlanta continues constructing the first phase, having completed foundation work on two parcels and also is coming out of the ground on a retail and luxury apartment building.

Commercial – Mixed Use is King

McGraw-Hill Construction’s Analytics division forecasts the Atlanta metro area to experience approximately $2.8 billion in commercial starts by the end of 2008, down from last year’s tally of about $3.1 billion.

Streets of Buckhead and other mixed-use developments dominate the Atlanta landscape.

“Mixed-use projects continue to be a big part of the private market,” Pinto says. “Urban versus suburban is the direction for the near future.”

Pinto adds that large tracts becoming available through military Base Realignment and Closure or industrial closings, such as the General Motors plant in Doraville and Ford in Hapeville, will transform sections of metro Atlanta.

Hardin Construction continues work on the $250 million, 1.4-million-sq-ft 3344 Peachtree, a 50-story tower with office, retail and condominium units atop a parking deck.

The company is heading for completion of 10 Terminus Place, a $50 million, 19-story condominium, which is part of Cousins Properties’ $660 million, 10-acre Terminus mixed-use development. Hardin is also working on Terminus 200, a second office tower.

D.H. Griffin of Ellenwood, Ga., began demolition and environmental cleanup work in July at the former Ford Motor Co. plant in Hapeville near the Atlanta airport for Jacoby Development of Atlanta. Plans for the development include 6.5 million sq ft of offices, retail, a hotel and a conference center.

Real estate firm CB Richard Ellis in Atlanta has begun marketing the former GM Motor Plant in Doraville as a mixed-use development site.

A couple of projects mix residential with hospitality. Bovis is working on the $150 million St. Regis Hotel & Residences, a 150-room hotel with 53 condominiums above. And Hardin continues building the $101 million, 30-story W Atlanta Downtown Hotel and Residences at Allen Plaza for Barry Real Estate Co. of Atlanta. Both are scheduled for 2009 completions.

The new office and commercial market “has basically gone away” because of the lack of available financing, Sanders says. However, Brasfield & Gorrie continues to work on a couple of office projects, including the approximately $40 million, mixed-use 1075 Peachtree and Phipps Tower, a $175 million, 20-story, 500,000-sq-ft office building in the Buckhead neighborhood for Crescent Resources of Charlotte, N.C.

Health Care still strong

Health care remains a strong market, says Sanders. Brasfield & Gorie has several projects under way, including expansions at Children’s Healthcare of Atlanta and at Northeast Georgia Medical Center in Gainesville, both scheduled for 2009 completions.

According to McGraw-Hill Construction’s data, health-care starts in metro Atlanta in 2007 were $321 million, up from $289 million in 2006. The value of 2008 health-care starts is estimated to tumble to about $257 million by the end of the year. However, the company still expects a significant rebound in 2009, with this market projected to total more than $300 million.

Education is another stronghold, with a large volume of projects in the pipeline at key universities in Atlanta and among K-12 school districts in the metro-Atlanta area. McGraw-Hill Construction expects Atlanta’s 2008 education starts to total about $1.6 billion, up from last year’s roughly $1.4 billion figure.

“There are strong opportunities in education,” says Philip Roy, vice president of the Southeast region for Barton Malow of Atlanta. However, he adds that at the college and university level, new projects are limited by funding. He says that with fewer allocations from the Georgia Board of Regents, local colleges will have to get creative in developing additional funding mechanisms for their building programs.

Barton Malow is general contractor on the 320,000-sq-ft North Fulton County High School, also known as the John’s Creek High School. Another noteworthy Barton Malow project is Cherokee County High School, which began in the last quarter of 2007.

Roy says that smaller commercial contractors suffering from the downturn in commercial markets are trying to enter new markets, such as K-12 schools. But he says experienced owners and program managers “know who the real players are” and are tending to stick with known contractors.

Roy says his firm is in an aggressive expansion mode. It has increased personnel by 25% in the last seven months, in expectation of expanding its presence in the Southeast and Atlanta. The company also is building the Gwinnett Braves AAA minor league stadium in Lawrenceville.

Public work

Government projects present a mixed bag.

Atlanta Hartsfield Jackson International Airport is in the midst of a $6 billion expansion.

Work on the $1.6 billion Maynard H. Jackson Jr. International Terminal is now getting started, after delays related to budget and design changes. The work is being done by Holder, Manhattan, Moody and Hunt Joint Venture, a partnership between Holder Construction Co., Manhattan Construction Co. and C.D. Moody Construction, all of Atlanta, and Hunt Construction Group of Scottsdale, Ariz.

The joint venture had started deep foundation work. An official groundbreaking ceremony is slated for this fall.

The Atlanta City Council in July approved a $31 million increase to cover rising materials costs at the airport’s Consolidated Rental Car Agency Complex, bringing the cost to $266.5 million. The facility includes space for 10 rental car agencies, 8,700 parking spaces, a 1.5-mi automated people mover and related road construction. Completion is scheduled for November 2009.

Airport General Manager Ben DeCosta attributed the increase to rising materials costs. The previous budget approved by the council in spring 2007 was $235 million.

When it comes to road work, the outlook is not so bright.

“The outlook for highway construction is not good at all,” says J. Bruce Melton, president of the Georgia Highway Contractors Association and CEO of Oxford Construction Co. of Albany. “Like a lot of states, Georgia undertook an advance funding program. It sounded good on the front end, but the chickens have come home to roost. [There’s been] a dramatic reversal of fortune in a year’s time [for the heavy highway market in Georgia].”

Melton estimates Georgia Department of Transportation construction contract volume for the fiscal year ending June 30, 2009, to come in at about $800 million, compared with $1 billion for 2008 and a record $2.7 billion awarded in the year ending June 2007. With fewer jobs, the average number of bidders per GDOT project is up between 60% and 80%, Melton estimates.

“It is not uncommon now to see eight to 10 bidders or more on some routine projects,” Melton says.

Residential

While new starts in the condominium market are essentially nonexistent, high-end rental apartment market still has some life. Total multifamily residential new starts in the metro-Atlanta area peaked in 2007 at about $2 billion, according to McGraw-Hill Construction. New starts in 2008 are estimated to tally nearly $1.5 billion. Projections for 2009 show a slight increase in new starts.

“It’s almost as if there are two multifamily markets,” says ABC’s Anderson, indicating multifamily projects other than condo have plenty of room for growth.

Trammell Crow Residential of Atlanta has started on two high-end Alexan-branded complexes in Atlanta. The company operates Alexan developments throughout the United States. It broke ground in May on its $110 million, 500,000-sq-ft Alexan 360 project near Freedom Parkway in east Atlanta. It started construction in June on a $65 million, 400,000-sq-ft Alexan MetroWest project in the city’s midtown area.

And firms continue to finish condo projects that were under way before the market fell out. R.J. Griffin is working on the $136.6 million Atlantic condominium, and Brasfield & Gorrie is completing the $126 million 3630 Peachtree condominium.

Overall, while contractors are staying positive for now, they’re also realistic.

Bovis Lend Lease’s Wallace expects it will take at least a year, perhaps 18 months, before lenders and owners will want to take a chance on moving forward with new starts.