Interest Rate Hike Douses Outlook For Atlanta Developers
The turmoil in the U.S. bond market is dampening the outlook for Atlanta’s developers who were hoping for some interest rate relief this year.
After a string of rate cuts between late 2024 and 2025, the Federal Reserve last month raised the benchmark rate by 25 basis points in an effort to tamp down inflation. Fed Chairman Kevin Warsh signaled that further rate hikes are possible — eroding optimism that new developments will pencil out.
“I don’t see a ton of green shoots, honestly, in the near future,” Coro Realty President Robert Fransen said last week during Bisnow’s Atlanta State of the Market.
Fransen said a combination of labor shortages, elevated inflation and rising construction costs is wreaking havoc on developers’ ability to obtain rents high enough to justify construction. Instead, Fransen said Coro is prioritizing buying existing real estate over new development.
“In terms of any significant new development, I don’t know what pencil of any kind of scale” will work on a new development project, he said during the event at 1375 Peachtree in Midtown.
“We do four different product types, and it’s hard to make the math work on any of them,” Fransen said.
For the first time since 2011, there were no new office developments underway in Metro Atlanta, despite positive absorption and a preference among companies to locate in the newest and best spaces.
But that is because the highest rents today — around $70 per SF — remain well below the rents needed to justify new office construction, said Selig Enterprises Chief Development Officer Steve Baile. Tenants would need to be willing to pay $90 per SF for a new office in Metro Atlanta, CBRE Associate Field Research Director Scott Amoson previously told Bisnow.
“We’re going to come out of the old cycle and into a new one with higher interest rates than we did going into it,” said Baile, whose firm developed the mixed-use 1105 West Peachtree project anchored by Google that delivered in 2021. “That is a hurdle we still haven’t figured out how to manage.”
Norm Radow, founder of The Radco Cos., said he believes higher rates will force struggling borrowers to sell assets at discounted prices, especially as $875B in outstanding commercial mortgages that were originated during record-low interest rates in 2021 and 2022 are coming due this year.
“There are very few deals that were financed in 2020 and 2021 that can refinance that payout today at a neutral amount,” Radow said. “You’re going to have to write a check, and very few sponsors today can write that check. And so we’re going to see a lot of dislocation.”
Despite Warsh’s hints that another rate hike might be needed, Radow said he believes that outlook won’t last under President Donald Trump’s term. Trump has been gunning for rate cuts and criticized the Fed’s decision last month.
Trump’s pressure on Warsh will mean it is only a matter of time before the Fed reverses its interest rate policy, Radow said.
“I think Warsh is a sheep in wolf’s clothing,” he said. “The U.S. can’t afford for rates to stay this high.”