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The Coming Commercial Real Estate Depression

The Journal had a chilling story about vacant office buildings today. Big, gleaming, spanking-new buildings:  

A one-mile stretch of Atlanta's upscale Buckhead neighborhood shows why commercial real estate is emerging as an obstacle to pulling the U.S. economy out of recession.

Separate developers in Buckhead are building four speculative office buildings at the same time with virtually no leasing activity. The 35 recent condominium projects will help give Atlanta a 40-year supply at the current sales pace. A $600 million outdoor shopping mall under way has suspended construction to save money. ...

Cousins [a developer] led Buckhead's most recent development boom. Taking advantage of a sewage project that made development possible, the company built a glass pinstriped tower called Terminus 100. It filled quickly with financial-services firms and other tenants after opening in 2007. "It riveted the development community," said Ken Ashley, an office-leasing broker with Cushman & Wakefield. ...

The first building to follow Terminus 100 was a project by Regent Properties called the Sovereign. It opened in mid-2008 and has managed to lease three-quarters of its space. After the Regent building came Terminus 200, Cousins's encore to its successful first tower, built next-door. It broke ground in early 2007. Mr. Bell, of Cousins, figured the other companies planning towers would fall away when they saw his bulldozers preparing the site.

But the others didn't stop. Mr. Bell describes stages of bewilderment as the other three projects moved forward so quickly. The Buckhead market on average absorbs 300,000 square feet a year, said Lanie Rea, a research manager at brokers Jones Lang LaSalle. That is less than the size of each tower.

There's a fine line between "irrational exuberance" and outright stupidity. But, wherever it falls, these guys are on the wrong side of it.

--Noam Scheiber