September 05, 2008
If Senior Vice President of Duke Realty Corp.'s Atlanta Office Group Kerry Armstrong sneezes, the rest of the commercial real estate community in North Atlanta gets a cold. It is his job to know the commercial market.
Armstrong directs the marketing, leasing and management of Duke's 4-million-square-foot, $545 million office property portfolio in metro Atlanta, almost all of it north of I-285, as well as the portfolio's growth and profitability through development, construction, acquisition and disposition opportunities.
That is why Armstrong is keenly interested in the health of the area's economy and is one of the most informed people about what the future holds in store for the northern arc.
He joined the company in 1990 as vice president of office properties. In 2000, Kerry was named senior vice president of Duke's Atlanta Office Group. During his tenure, he has been recognized as a leading producer in the company, as well as in the industry in metro Atlanta.
Armstrong is also chairman of the North Fulton Community Improvement District, which is a consortium North Fulton properties in the Ga. 400 corridor that funds infrastructure improvements and lobbies for district projects. He sits on the Atlanta Regional Commission board, is also chairman of economic development for the Gwinnett Chamber of Commerce as well as a board member of the Greater North Fulton Chamber of Commerce.
He recently sat down with the Business Post to talk about the state of real estate market and where it is headed.
BUSINESS POST: So give us a snapshot of where real estate market is right now.
ARMSTRONG: Commercial real estate has not been impacted nearly as badly as the residential real estate world. But you can't have that much upheaval in the economy without having it affecting all sectors of the economy. So we're feeling it too.
The simplest way to put it is when you have this much going on in the economy, a lot of it bad, it results in a tremendous amount of uncertainty. A lot of what we're seeing on the commercial side is our customers, our tenants and our buyers of commercial assets have just about shut down due to this uncertainty in the economy.
It is difficult to get anything done or transact business because there are so many questions that can't be answered yet.
BUSINESS POST: A lot of it has to do with the financial institutions shutting down, isn't it?
ARMSTRONG: Not completely. We're seeing a little bit of improvement in the availability of financing for commercial property. But they are certainly tighter than in the past. It is not that there is a shortage of money out there. But there is a lot of caution over this uncertainty.
They don't know where the interest rates ought to be or how much equity there out to be in the project. You have this hurdle of uncertainty in the economy, and we are just going to have to get over it.
But whatever you call the situation, it's not over. There is more bad news to come before we can clear the decks.
BUSINESS POST: So how long will hard times or this uncertainty go on?
ARMSTRONG: We're going to be bumping along. I was thinking of the third or fourth quarter of '09, but now it is looking more like the first or second quarter of 2010.
Atlanta is not getting hit as hard as other areas of the country, which has particularly to do with Atlanta's vibrant economy. It is fairly broad and not tied to just one or two industries.
BUSINESS POST: Atlanta has always had the ability to expand. There are no geographic barriers like mountains or oceans to stop its expansion. Doesn't that fuel expansion and keep speculation in check?
ARMSTRONG: That lack of physical constraints is not really true. Construction costs have continued to rise. So new product, even if the land costs are the same, is going to be more expensive.
BUSINESS POST: How big a role does the price of oil play in the mix?
ARMSTRONG: It contributes to the uncertainty. Oil factors into that in a couple of ways. Whatever you're going to build, it has to be trucked in. And moving dirt around means having a lot of yellow machines running around.
But commercial real estate needs roads and parking lots, too. That means lots of asphalt, and asphalt is made out of oil. So the cost of oil permeates everything we do. The cost of oil permeates everything you do.
Rising cost of steel has been a contributor to the rising costs of construction. China has been using a lot of steel. And even drywall is going up.
BUSINESS POST: So what is the good news?
ARMSTRONG: Well, since this is a vibrant, diverse economy, Atlanta's job growth will be ahead of the national average in the coming year.
BUSINESS POST: Even in good economic times, transportation has been an ongoing thorn to both economic growth and quality of life. How does it stand now in the grand scheme of things?
ARMSTRONG: It's huge. Transportation is today one of the three in-your-face problems that metro Atlanta is wrestling with. The other two are water and education.
You alluded to unrestrained growth earlier, but there are two major constraints to growth, transportation and water. Those are Atlanta's Achilles heel. Now we are not going to run out of water, but it is a limited resource.
Solutions other than rainfall, take a long time, are hard to make come about and are costly. We are only going to get about 54 inches of rain every year. What we have to do is figure ways to make it last.
Transportation has been the issue for business, and by that I mean anyone with a job and a life. I think we have reached the boiling point. Everybody is exasperated with the situation.
BUSINESS POST: Isn't part of the problem educating the public? Ask most people to define sprawl and density, and they will say one equals the other. That's a hard chain to break. How do we present people with solutions and have them understood as such?
ARMSTRONG: The mayor of Seattle was in Atlanta recently and he said our residents are like his, they hate sprawl and they despise density. But you can't be both ways. Part of what it is going to take is enlightened community leaders and enlightened developers and business interests demonstrating how it can work.
That is one of the things we are trying to do through North Fulton Community Improvement District's Blue Print North Fulton. We are trying to gather as much opinion from this broad public as we can about what sort of environment they want to be in and what they want it to look like and feel like.
The tide has turned a little bit. We're finding the people generally like what you would expect them to like, but they have learned to differentiate. They no longer expect every part of North Fulton County to feel the same way.
They do like walkable environments, people-oriented environments with pedestrians travel and alternate modes of transportation. They get that. They understand there are places when you need places of high density development. It's going to take a few well-conceived projects to get under way so people can see them and react to them.
But these are projects that have multiple uses together. It's truly mixed use.
I can show you a 2,000-acre development in Gwinnett that has multimillion-dollar homes, townhomes, multifamily apartments, condominiums, shopping, several million feet of office plus jobs and civic entertainment opportunities.
But it is not mixed use. You have to get into your car to get from one to the other and drive a half-mile. It's just not laid out to be connected.
Metro Atlanta has some brilliant attempts at this. Everyone points to Atlantic Station as one. I know people worry about the transient populations of multifamily and the problems that can bring. But of all my friends, I don't know any who didn't start out in an apartment.
You need that component out there, that's one of the things we are realizing as we get through this financial crisis. There are a lot of people who own homes and shouldn't. They really couldn't afford them, but the financial environment allowed them to get into them.
BUSINESS POST: So how does Duke Realty see the future in metro Atlanta? Is it all gloom and doom?
ARMSTRONG: Not at all. Even in the worst drought on record, you can see how to manage water for the next 30 to 35 years. The transportation problem is really just a matter of political will and money.
But it is going to take a lot of political will, and it is going to take a lot of money to address our transportation issues. But we control that.
I'm not so worried about the next 20 to 30 years as I am the next 50 to 100 years. That's a pretty distant horizon, but that's where we really need to focus. Thirty years will be here in a heartbeat.
The worst thing that could happen would be to get a surfeit of rain and bring this drought to a nice, rosy close. Because then the public and the leaders relax, and the issue gets off the front burner.
That's what happened the last time we had a drought. Florida had four hurricanes in a row, we got a tremendous amount of rain and we forgot all about it. The public pressure went away, and we forgot about it.
So it will only happen again, only the next time we will have more people.
BUSINESS POST: But how can we claim to be able to bring more people here in the coming years even if we conserve like never before?
ARMSTRONG: The water is here. What I don't understand is why Atlanta is blamed for the water problems that Alabama and Florida are experiencing. Atlanta is so close to the headwaters of the Chattahoochee, that 95 percent of the Chattahoochee Basin is below Atlanta. We only use about 2 percent of the water we do see.
Atlanta is not the problem for these other states.
But as for our outlook on Atlanta, we have over a half-billion dollars invested in this market, and we plan to invest millions more. Atlanta is still a vibrant economy, it's a growing economy. It's going to have its ups and downs like anyplace else, but we have a lot of confidence in Atlanta for the long term.
The quality of our investments is only as good as the quality life in the areas they are in. It is no accident we have invested hundreds of millions in Atlanta. We feel good about it.
- www.northfulton.com
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