The crash in the U.S. bond market dampened the prospects of Atlanta developers who had hoped to see interest rate cuts this year.
After several rate cuts between the end of 2024 and 2025, the Federal Reserve last month raised its benchmark rate by 25 basis points in an effort to curb inflation. Fed Chairman Kevin Warsh has signaled that further rate hikes are possible – undermining optimism that new developments will emerge.
“I don’t see a lot of green shoots, to be honest, in the future,” Coro Realty President Robert Fransen said last week during BisnowAtlanta State Market.
Bisnow/Brandon Elsasser
Kimley-Horn’s Brian West, Selig Enterprises’ Steve Baile, Yellow Bird Project Management’s Katherine Zanaty, Fogarty Finger’s Candace Rimes, HJ Russell & Co.’s Jerome Russell and Coro Realty Advisors’ Robert Fransen
Fransen said the combination of labor shortages, high inflation and rising construction costs has wreaked havoc on developers’ ability to get rents high enough to justify construction. However, Fransen said Coro prioritizes buying existing real estate over new developments.
“In terms of significant new development, I don’t know what pencil any kind of size” will work in the new development project, said during the event at 1375 Peachtree in Midtown.
“We do four different types of products, and it’s hard to make math work on any of them,” Fransen said.
For the first time since 2011, no new office developments have taken place in Metro Atlanta, despite the positive uptake and preference among companies to locate in the latest and greatest space.
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Bisnow/Jarred Schenke
HJ Russell & Co. Jerome Russell and Robert Fransen’s Coro Realty
But this is because the highest rent today – around $ 70 per SF – remains well below the rent needed to justify the construction of new offices, said Selig Enterprises Chief Development Officer Steve Baile. Tenants should be willing to pay $90 per SF for new offices in Metro Atlanta, CBRE Associate Director of Field Research Scott Amoson previously told Bisnow.
“We’re coming out of an old cycle and into a new cycle with higher interest rates than we’ve had,” said Baile, whose company is developing the Google-provided 1105 West Peachtree mixed-use project slated for delivery in 2021.
Norm Radow, founder of The Radco Cos., said he believes the higher rates will force struggling borrowers to sell their assets at discounted prices, especially since $875B in outstanding commercial mortgages originating from low interest rates in 2021 and 2022 will come due this year.
“There are some deals that are funded in 2020 and 2021 that can refinance those payments today at a neutral amount,” Radow said. “You have to write a check, and some sponsors can write that check now. So we’re going to see a lot of dislocation.”
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Bisnow/Brandon Elsasser
FTI Consulting McRae Thompson, Graham Group Jeffrey Graham, JMS Family Office Jay Patel, KJA Architecture Chris Kacena, Patterson Real Estate Advisors’ Lance Patterson and The Radco Cos. Norma Radow
Despite Warsh’s hint that another rate hike may be necessary, Radow said he believes that prospect will not last in the era of President Donald Trump. Trump has been gunning for rate cuts and criticized the Fed’s decision last month.
Trump’s pressure on Warsh means it’s only a matter of time before the Fed reverses interest rate policy, Radow said.
“I think Warsh is a sheep in wolf’s clothing,” he said. “The U.S. cannot afford to keep tariffs high.”