By Brad Alexander, partner, Georgia360
ATLANTA (Jan. 4, 2011) - The November 2010 statewide elections resulted in a historically large - some would say massive - turnover in Georgia's political leadership.
Georgia now has a new governor, attorney general, secretary of state, labor commissioner, school superintendent, agriculture commissioner and insurance commissioner. And when the 2011 Georgia General Assembly convenes next week, it will do so with abnormally large freshman classes in both the House and Senate.
This election - and subsequent party switches by elected officials -- have solidified GOP control of state government in the near term.
Combined with Georgia’s substantial budget deficit, the level of change expected in the next 12 months will be higher than anything residents have become accustomed to expecting. And, the implications for the commercial real estate industry will be substantial.
In terms of people, the leadership of Georgia's in-house real estate management agencies - Steve Stancil, Marvin Woodward, Frank Smith, Susan Ridley and their team - will remain intact.
Combined with the staff at the Board of Regents, the Georgia State Financing and Investment Commission will make most of the decisions regarding the state's new construction projects and real estate portfolio. In addition to being one the largest sources of new commercial construction starts in a down economy, the state’s taxpayer-owned real estate portfolio is one of the largest combined real estate portfolios in the state. While the state construction portfolio will shrink in terms of new starts as revenue falls off, it will remain more robust than the private sector in the near term.
In addition to the Board of Regents (which is in the early stages of a search for a new chancellor) and the GSFIC, the Department of Natural Resources and Department of Transportation are also highly relevant for the real estate purposes. Managing the owned and leased conservation and recreation portfolio at DNR will be newly appointed commissioner and former state representative from Southeast Georgia, Mark Williams.
On the DOT side, several board seats will change hands, but the commissioner's job will remain with Vance Smith. Smith's leadership and political acumen will be highly valuable as the state enters the election cycle where voters will approve or reject any new transportation funding mechanisms the legislature puts on the ballot.
From a policy standpoint, state real estate activity will be driven almost exclusively by value.
In terms of new construction projects, those that have appeal but do not fill a critical and immediate need will be delayed as policymakers try to maintain the state’s AAA bond rating in the midst of substantial cash shortfalls. This means the government’s appetite for financing structures outside traditional general obligation bonds (particularly in higher education) will continue to grow. This will include both traditional alternative finance mechanisms - such as fee-driven projects at universities - and more innovative structures.
Chief among the more innovative structureswill be energy savings performance contracts, which became legal in Georgia following passage of Amendment Four in the November elections. Initial estimates project that savings from these contracts will fund several hundred million dollars in facility and systems upgrades.
On the bright side, with historically high levels of unemployment, we can expect to see a proactive government role - led by Governor Nathan Deal and new Economic Development Commissioner Chris Cummiskey - in funding and otherwise supporting private sector projects that could create substantial numbers of new jobs. Cummiskey's corporate background (energy trading) and political connections (top staffer in the state House) combined with the new Governor's focus on job creation will give the Department significant heft.
From a development and leasing standpoint, this political dynamic will hopefully lead to new activity, particularly in the corporate HQ, data center, healthcare and logistics spaces. This effort will be substantially boosted if recommendations from the tax reform council that would turn automatic credits into a more discretionary system are followed.
Additionally, legislation will be reintroduced to amend the Constitution so Georgia can execute multi-year real estate leases. While this change is two years away, its passage will almost certainly unlock an array of transactions as Georgia seeks to lower leased real estate costs by replacing annual leases with those with longer terms.
Going forward, the primary challenge for the real estate sector in terms of Georgia public policy will be to prevent likely passage of broad tax reform and certain passage of major budget cuts from moving the ball backward. Additionally, the industry has a strong interest in ensuring Georgia's core infrastructure is maintained and upgraded.
In the near term, that means passing a transportation funding mechanism for urban parts of the state, dredging the Savannah harbor ahead of a bump in traffic when the Panama Canal expands, and supporting Atlanta Mayor Kasim Reed's visionary efforts to put Hartsfield at the same high level on air cargo rankings as it is on passenger transport. Over the longer term, building new reservoirs and connecting cities via high speed rail will be very relevant in terms of keeping commercial real estate activity robust in Georgia.
In sum, there's a great deal of reason to be optimistic about the future role state government can play in maintaining Georgia's future as not only a consumer of real estate services, but also an exporter of expertise in that area. They key challenge for the industry is staying engaged enough over the next several years to ensure that potential is realized as the process plays out.
