Smart Business spoke to John M. Leonard, the first vice president
and regional manager of the Atlanta office of Marcus & Millichap Real Estate
Investment Services, about where opportunities lie in the distressed real
estate market.
How high is the level of
distress in the Atlanta commercial real estate market right now and what does
it mean to investors?
Weak economic conditions
through the recession took a toll on commercial real estate fundamentals in the
Atlanta metro area, leading to a significant amount of distress. Approximately
$5.1 billion of real estate in Atlanta can be classified as distressed, placing
it near the center of the pack when scaled to the market’s size and compared to
other major metros nationwide. The distressed dollar volume total includes
approximately $3.4 billion in troubled properties and another $1.7 billion in
assets already reclaimed by banks. The figure does not include, however, the
roughly $650 billion in commercial mortgages that has been restructured or
extended, or the $1.3 billion in distressed commercial real estate deals that
have already been resolved.
Which sector of the
investment real estate market has been impacted most by these delinquencies?
As of third quarter,
apartments account for the largest share of distressed dollar volume in the
Atlanta metro area, which should translate into some strong acquisition
opportunities for investors as fundamentals recover. Interest in stabilized
lender-owned properties remains particularly high, and several sales involving
this type of asset have already occurred. Prices for these deals generally
start below replacement costs at less than $40,000 per unit, with cap rates
varying from 8.5 percent to 9.0 percent. Assets with deferred maintenance or
high vacancy also continue to attract interest due to opportunities to
strengthen performance in the quarters ahead, but cap rates typically will
begin above 9 percent. While the expected improvement in occupancy and rents
will bolster NOIs, new supply will slow through the remainder of this year and
into 2011. The slowdown in construction will provide greater opportunity for
new owners to rebuild property operations.
