Financing New Projects In Atlanta 'Not For The Faint Of Heart'
The upheaval in capital and debt markets means few new commercial developments will break ground in Metro Atlanta in the near future. But those projects that move forward will do so with builders saddled with more expensive loans and putting a lot more of their own money into the development, panelists said at Bisnow’s Atlanta Construction and Development Summit last week.
“It's certainly not for the faint of heart to be trying to finance and capitalize development projects in the current environment,” SJC Ventures principal Fain Hicks said during the event held at The W Atlanta Downtown.
The rapid rise in interest rates has wreaked havoc on the commercial real estate industry, with loans and other debt becoming rapidly more expensive and banks pulling back on new lending as property values drop. This dynamic has slowed the start of new commercial developments across the country, especially new retail centers, offices and warehouses.
Hicks, whose firm developed The Interlock on Midtown Atlanta’s Westside, said there is money available to developers with a track record and conviction, but it’s not without complications.
“Financing is available, but it’s a lot more expensive and it takes a lot longer,” he said. “To complete the capital stack, you either have to contribute more equity, which impacts the project's returns, or there’s preferred equity or mezzanine lenders, which kind of create additional layers and many different additional considerations compared to just kind of doing a traditional construction loan with your relationship bank.”
SJC began construction last year on The Interlock’s second phase, which includes 185K SF of office, a 42K SF Publix Super Market and an additional 38K SF of retail. Peak Campus also developed a 670-bed student housing tower that opened this summer. The remainder of Phase 2 is expected to deliver next year.
The second phase was financed by Ameris Bancorp with investment from Packard Capital and other family office investors, SJC principal Jeff Garrison previously told Bisnow.
In addition to having to use more alternative lenders, Hicks said developers are having to put a significant amount of their own equity into projects, with lenders only willing to leverage up to 60% of the construction costs.
“And your pricing is at least double what it was a year ago, so 8% to 9% instead of 3.5% to 4%. That's impactful,” he said.
Hicks said equity partners — especially institutional investors — are in a “kind of rediscovery” in how they plan to deploy their dollars, with firms reallocating their investments away from office and toward retail developments.
“The debt piece seems to be the harder part of the equation, and you're seeing new capital formation and new participants coming into the market for that, to kind of compensate for the lack of activity from banks, which historically have been the main source,” Hicks said.
Aside from interest rates, inflated construction costs have made it more difficult for developers to make the finances work for new projects, Selig Enterprises Chief Investment Officer Matt Rendle said.
“What that means is you’ve got to then underwrite either strong rent growth, which is very difficult to do right now,” Rendle said. “Even if we underwrite it, that doesn’t mean that our partners nor lenders are going to underwrite it. Then you’ve got to guess at a cap rate, which is equally challenging right now.”
Despite the financing and economic headwinds, a handful of developers at the event highlighted major redevelopment projects that could soon begin their ascent.
Edens is planning to start construction soon on the first phase of its redevelopment of the ailing North DeKalb Mall, Managing Director Herbert Ames said. The first phase would include 270K SF of retail, a hotel and townhouses, along with the demolition of the old mall.
Ames said the demolition would begin “late this year, early next year” and estimated the total project, which has been dubbed Lulah Hills, would take up to 10 years to complete.
“That is, we think, going to really wake up this part of Atlanta,” Ames said at the event. “It’s been a little sleepy, quite frankly. Not to mention the fact that we have a dead mall that’s pretty horrible to look at, not really encouraging a lot of investment around it. So that was really one of the fundamental catalysts of what we’re trying to do here.”
Ames said the mall is ripe for redevelopment given the population around the site — 880,000 residents averaging $125K annual household income — and its proximity to Emory University.
Since acquiring the 622K SF, 58-year-old enclosed mall in 2021 from the Sterling Organization for $24.2M, Edens has been gradually building out its vision for the mixed-use campus. It unveiled its initial plans last year to develop 200K SF of office, a 150-room hotel, 1,700 apartment units and 100 townhouses.
New City Properties President Jim Irwin said his firm is planning a new phase of its Fourth Ward project, the former Georgia Power site bound by the Historic Fourth Ward Park and the Atlanta BeltLine in Midtown. New City has already delivered a 480K SF office building with street-level retail, which is part of a multi-phase office project totaling nearly 1M SF, it previously announced. The second phase is set to include two apartment projects with street-level retail, Irwin told Bisnow after the event.
Gwinnett County Commissioner Kirkland Carden outlined the latest plans for the redevelopment of Gwinnett Place Mall, which is set to include seven “villages” around a central green space as well as a bus rapid transit terminal, he said.
“The global villages will focus mainly on housing, which will be connected by a series of green spaces and paths with public art,” Carden said, adding that the master plan calls for 3,800 housing units.
