FEATURE ARTICLE, AUGUST 2004

SUBURBAN OFFICE MARKET UPDATE

Atlanta

Due to the oversupply of space in most suburban Atlanta office markets, development has been limited to build-to-suit activities. As the office market continues to heal, developers will begin pre-marketing projects to “seed” the tenant and brokerage community in advance of the market conditions that will justify new supply. No suburban projects are under construction, and none are currently foreseen in the near term.

Looking into the future, it is reasonable to assume that the first new speculative developments will occur in either Midtown or Buckhead. Buckhead continues its reputation as Atlanta’s most desired office submarket.

In the suburban areas, we anticipate new construction first occurring in submarkets such as North Fulton and up the Interstate 85 corridor near Sugarloaf Parkway. Statistically, North Fulton has a long way to go to reach rental rates that will support new construction. However, we believe demand in this corridor will be strong as the Atlanta economic recovery moves forward.

The I-85/Sugarloaf submarket is small in comparison, but new executive housing in the area coupled with limited supply have made this a tight submarket capable of supporting higher rents. Duke Realty Corporation controls the premier land sites and has done an excellent job maintaining a proper balance between supply and demand.

Asking rental rates are $17.50 to $20.50 with effective rents as much as a 20 percent discount over face rates. The current overall average vacancy in Atlanta’s suburban office market is 19.9 percent on a direct basis; 23.5 percent if sublease space is included.

Prospects for job creation in metro Atlanta are good over the next 24 months. Experts predict 50,000 to 70,000 new jobs per year, translating to an office expansion of 3 million square feet per year. All markets will benefit; however, North Fulton, Central Perimeter, Downtown and Midtown figure to grab the lion’s share of this activity, in part because of the availability of large, high-quality blocks of space. We believe the markets will begin to feel the effects of this job creation by the end of 2005 with a statistical correction occurring by 2007 leading into the next swing of the real estate cycle.

— Tony Bartlett, senior vice president, Lincoln Property Company

Birmingham, Alabama

Jones

Development of Class A office space is still almost nonexistent in Birmingham. I expect the Highway 280 market will continue to attract developers due to the continued strong and aggressive residential growth and development.

Two major lease transactions have occurred in the Highway 280 submarket in the past 12 months. Infinity Insurance Company has signed a lease for approximately 125,000 square feet at 3700 Colonnade and will occupy this building in approximately April of 2005. BlueCross BlueShield signed a lease for approximately 100,000 square feet at the Meadow Brook 300 Building in Meadow Brook Corporate Park and occupied the space in two phases in July and August.

The range for Class A rental rates in suburban Birmingham is $18 to $21. Overall average vacancy is 7 percent; if you add available sublease space, the vacancy is only 10 percent.

Suburbs seem to be in demand and the CBD is still experiencing high vacancy rates. The office market in suburban Birmingham is definitely tightening up.

— Brad Jones, vice president of leasing, Daniel Corporation

Lexington, Kentucky

Isaac

The Lexington suburban office market is expected to remain stable. There will be only a few new office projects in the suburbs and none in the CBD. Office condominiums and approximately 15,000 to 25,000 square feet low-rise buildings are the most common projects being developed in Lexington today.

Suburban office land continues to be in demand in Lexington with new projects occurring within the Beaumont, Hamburg and Wellington developments. Developers are focusing on these projects due to the majority of the zoned professional office lots that are available in these areas.

At Beaumont Centre in southwest Lexington, local developers have had success in building office condominiums to complement the existing office projects within this mixed-use development. They currently have four 21,000-square-foot, three-story office buildings under construction, bringing the number of office buildings recently constructed to 10.

Developers Barry Mangold and Royce Pulliam recently closed on an approximately 10-acre parcel with approximately 80,000 square feet of office space along with a new Gold’s Gym slated to occupy the site. This site is located adjacent to Palomar Shopping Center at Man O’ War Boulevard and Harrodsburg Road.

Eagle Creek Office Park has several small buildings in various stages of construction from 5,000 to 40,000 square feet. These new buildings will finish out this mature office park.

Numerous new office projects were recently completed within the Hamburg Place development. A joint venture that includes the Madden Family, developer of the Hamburg project, has finished construction of Hamburg Place, a 75,000-square-foot speculative, Class A office building. Louisville, Kentucky-based Steier Development has completed Phase I of Hamburg’s first office condominium project, Stone Crest Office Condominiums, and Phase II is under construction. Quest Engineering relocated its corporate headquarters to Hamburg and Credit Bureau Systems has constructed a new office facility for its Lexington branch.

Within the Wellington development, located in south Lexington, continued construction of office condominiums and pre-leasing space for future office buildings within the development is occurring. An insurance company recently acquired land to build a 30,000-square-foot office building in which it will occupy half and lease out the other 15,000 square feet.

Existing suburban office projects remained stable in 2003; however, in the first half of 2004, vacancy levels have trended up and rental rates are under pressure due to the amount of new construction.

The range for Class A rental rates in suburban Lexington is $16.50 to $18, with an effective average of $17. Suburban office market vacancy rate is estimated to be 13.5 percent and is also on the increase largely due to construction of new space. There is a significant amount of suburban space that is under construction and not included in the vacancy survey.

While Lexington has no new office buildings planned for the CBD, it is seeing increased interest by developers in building residential units. The University of Kentucky and the city of Lexington have agreed to work closer together to bring campus activities to the CBD.

— Bruce Isaac, SIOR, CCIM, senior vice president, NAI ISAAC

Nashville, Tennessee

Murphey

Several developments are on the drawing board in suburban Nashville, but developers still are not ready to pull the trigger. While vacancy has declined over the past year, rental rates have not increased significantly to warrant development; however, they are trending up, and tenant improvement and free rent concessions are diminishing, which could put additional development in motion. The market is still cautious of the economy and job growth in particular. Subleases still factor into the mix, but they are becoming less of an issue.

The Roundabout Plaza in the West End/Music Row market, scheduled for November occupancy, brings the first new product to that market since 2525 West End in 2000. On the drawing board are The Summit and Belle Meade Town Center, also in the West End area. While the West End has historically been the place to be and as such has commanded some of the highest rates in the city, activity has slowed from previous years and too much building will put un-needed pressure on the market..

In Brentwood/Cool Springs there appears to be more than one developer anxiously watching the market. The market is tightening with slight spikes in rental rates and moderately declining concessions. As is always the case, timing is everything and if played out correctly a moderate amount of new development will be healthy for this submarket.

There is no anticipation of additional development in the Airport, Metro Center or North submarkets due to continued lack of demand.

The range for Class A rental rates in suburban Nashville is $10 to $25. As of first quarter 2004, the current overall average vacancy in Nashville’s suburban office market was 14.8 percent.

Overall, the Nashville suburban market remains fairly healthy. Activity is picking up. Tenants are finding it more difficult to locate adequate spaces and those delaying decisions often find their preferred location already leased. While the CBD was fortunate in securing sizable corporate relocations late in 2003, the vacating of approximately 80,000 to the Roundabout Plaza along with several other good corporate tenants to other suburban markets leaves a question mark in the future for the downtown office market.

— Allen Murphey, senior associate — office services, Grubb & Ellis/Centennial

Washington, D.C.

Boyd

There are two trends in suburban D.C. office market development: more development closer in to Washington, D.C., in the Roslyn/Ballston Corridor (RB Corridor) and more build-to-suit opportunities.

A few significant developments include Potomac Yard in Crystal City, Arlington Gateway in Ballston, Waterview in Roslyn and 3434 North Washington Blvd. in Clarendon.

The RB Corridor is seeing the most speculative building because of the proximity to the Metro transit system, Washington, D.C., and the Federal Government. Also, Potomac Yard in Crystal City is receiving attention for the same reasons, including proximity to the Pentagon. All of these projects are in Arlington County, Virginia.

The EPA leased 309,300 square feet at One Potomac Yard, located on the corner of Crystal Drive and Potomac Avenue in Crystal City. Also, Booz Allen signed on for 242,000 square feet at Woodlands in Herndon Virginia (Dulles Toll Road area).

Rental rates range from $27 to $34 in the RB Corridor and the Reston Town Center is up to $37 per square foot, full service. The average rental rate in Tysons Corner is $25.85 per square foot and $24.70 per square foot in Reston/ Herndon.

The overall vacancy rate has dropped to approximately 12.5 percent with approximately 135 million square feet of office space in Northern Virginia.

The activity continues to remain very strong and we are seeing rental rates increase 5 to 10 percent over last year, while well-located Class A space is being leased rapidly, and B buildings are being pulled up with the market. The RB Corridor and the Dulles Toll Road seem to be the most active markets.

— Kirk Boyd, president — corporate services, Coldwell Banker Commercial Capital Realty Services

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