The next real estate bust is in motion -- this time involving commercial property -- thanks to the recession.
Local lenders and developers, though, think there is enough economic stability in Augusta to protect against the worst of the commercial real estate correction, much in the same way the metro area did not see residential price declines and foreclosure levels of the nation's hardest-hit cities.
"There are three economic sectors currently showing positive growth regarding real estate development and construction in the U.S. -- government, education and medical. Augusta has all three in high concentrations, and this should hedge against commercial property devaluation," said Cal Evans Jr., a loan administrator for Synovus-operated bank AFB&T. "It won't stop value loss, but it will certainly mitigate the effects of the overall economy."
Investor services company Moody's reported Wednesday that commercial real estate prices nationally have dropped 37 percent since September 2008 and 42 percent since their peak in October 2007. The commercial property price index hasn't been this low since 2002.
"We haven't bought in 41/2 years. In our view, property was being overpriced four years ago," said John Gibson, the president of Augusta-based retail-mall owner Hull Storey Gibson Co., which owns 17 malls in the Southeast and is among the top 50 retail real estate owners in the country.
Mr. Gibson said the nation is overbuilt with retail space, and the "madness" of the last few years of easy money and inflating commercial prices is coming home to roost. Consumers are no longer spending like they once did, using credit cards and equity loans to fund purchases, so retailers no longer have a demand to add stores.
Mr. Gibson is predicting a contraction in retail space across the country.
"People are losing houses and jobs, so that consumption isn't coming back. Unemployment is high and people are looking for value," Mr. Gibson said. "I wouldn't want to own a building with Williams- Sonoma (retailer of high-end kitchen products) in it."
Fueling the commercial-property bubble was easy money to buy overpriced developments.
Mr. Evans said the massive devaluation of land across the country is mostly seen in appraisal values. Landowners haven't been willing to sell for a loss.
"As we get worse, this unemployment isn't going away soon, these development groups and shopping centers are going to fail and need to be liquidated to satisfy the bank or investment fund," Mr. Evans said.
One of those devaluation scenarios could be playing out to the benefit of Hull Storey Gibson. Though it hasn't bought a mall in more than four years, the company has its eyes on two of them now: in Macon, Ga., and Burlington, N.C.
When their owner, Lightstone Group, bought them "at the height of the frenzy," Mr. Gibson said, the New York company paid $171 million for the two malls.
"We told them what we thought they were worth," Mr. Gibson said. The offer is $35 million for both.
That level of devaluation is an extreme, Mr. Gibson said, but the funding scenario isn't.
"Do I believe all commercial loans were made with that level of madness? No. Were they made with a level of excess? Yes. Did (banks) fund people who had no experience running commercial real estate? Yes," he said.
There will be bargains to be gobbled up by other commercial firms as the market meltdown plays out, Mr. Evans said.
"A developer may build 20 shopping centers, 10 of them weren't good deals. Those 10 will be bad enough for him to sell off everything, including the good ones," he said.
"The tide is still going out on the American economy and we may not reach low tide for another two years," said Mike Graybill, principle with Blanchard and Calhoun Commercial. "Many good businesspeople are caught in a terrible undertow and are drowning because banks who usually throw them a life raft have themselves drowned in a sea of bad loans. The banking rules in Georgia changed in July where banks can't renew even good loans."
The Augusta-based commercial real estate developer anticipated the downturn in the economy and restructured all of the loans on its investments in time to avoid the credit crunch, Mr. Graybill said.
Mr. Gibson said his company's malls are well-established in good areas of their cities. He expects the coming consolidation of retail space will drive the retailers to the malls.
As shopping centers empty, retailers will relocate to clump together, leaving some areas full and others empty, Mr. Gibson said.
If any Augusta commercial property is going to go under, Mr. Evans said, it will likely be a recently-built strip center without a grocery store or a nationally-known retailer. "Something that was thrown up because it seemed the growth cycle was never going to end," he added.
Danger signs will be the appearance of nontraditional tenants, such as churches and offices, and an overabundance of salons and martial arts-training facilities, he said.
"If you look at retail that is grocery anchored or has something geared to a lower price point, like Walmart, it seems to be hanging in there well. That goes back to the fact that there are still rooftops popping up. There are still jobs coming into Augusta. As long as that's happening, that's going to prop you up, where the opposite trend has hurt Atlanta," Mr. Evans said.
A majority of the commercial office property that's being developed in Augusta is medical, Mr. Evans said.
"For developers, medical is still attractive to them because there's a high demand for it," Mr. Evans said. "I think you're going to see medical property stay stable."
Office property that doesn't have medical tenants, however, will "take a hit," he said. As companies shut down or downsize, office complexes are going to suffer from leaving tenants without a lot of small-business expansion to fill in the gap.
There's a lot of negotiating taking place between tenant and landlord. "Everybody is asking for a rent reduction," Mr. Evans said.
Mr. Gibson said his company's mall tenants have also been asking for rent reductions, a case that will be taken up as each tenant reaches the end of their lease. He said the company is adhering to the lease contracts. When times were good, he said, the tenants weren't offering to pay more rent.
For office landlords, Mr. Evans said, the rent reductions might the best option in an effort to keep tenants from moving to cheaper, vacant space.
"It is a renter's or buyer's market," he said.
Commercial lenders have returned to more stringent rules, Mr. Evans said, where 10 percent down isn't good enough.
"I wouldn't say there is a lack of capital to lend. Call it a return to fundamentals, and that's where the credit crunch is perceived," Mr. Evans said.
Some markets will remain tough to get financing, Mr. Gibson said, estimating the financing of a retail mall would require 50 percent downpayment on the loan.
Reach Tim Rausch at (706) 823-3352 or timothy.rausch@augustachronicle.com.
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It will look like it does in California- you go to shopping malls, they look like ghost towns. Store after store after store-vacant.