SOUTHEAST SNAPSHOT, OCTOBER 2008

Atlanta Office Market

Atlanta’s office market is not all doom and gloom, and in many cases is holding steady through an overall economic downturn, but one obvious trouble spot looms with the Buckhead submarket.

Atlanta has 5.2 million square feet of office space under construction, 2.1 million of that total in Buckhead. Overall, vacancy has remained fairly steady, reaching 16.8 percent at the end of the second quarter, compared with 16.2 percent a year prior. Buckhead vacancy stood at 17 percent overall at the end of the second quarter, but Class A space posted 19.5 percent vacancy. Buckhead vacancy rates could reach 27 percent by 2010 as new Class A properties deliver in the next 2 years.

Four Class A towers are currently under construction: Cousins Properties’ Terminus 200 building, Crescent Resources and Manulife Financial’s Phipps Plaza, Duke Realty Corp. and Pope & Land Enterprise’s 3630 Peachtree, and Tishman Speyer’s Two Alliance Center. None of these properties have announced any preleasing. Regent Partner’s 3344 Peachtree development delivered in the second quarter, after Terminus 100 and before the other four properties, and is closing in on 80 percent leased. Each of these developers has the financial clout and market savvy to ride through a glut of space, but the submarket’s historical performance suggests it may take a while.

Buckhead’s 10-year average annual net absorption points to that 27 percent vacancy rate. The submarket typically absorbs one new office building of 300,000 to 500,000 square feet every 12 to 18 months. With Class A asking rates of $27.70 at the end of the second quarter, properties in the submarket draw the highest rental rates. These properties attract high-end, image-conscious tenants, like financial and professional services firms of an average size of approximately 10,000 square feet. Lower-cost submarkets tend to draw the Fortune-500 headquarters and regional headquarters. 

The new properties also will leave blocks of empty space in existing buildings, creating headaches for the owners of those properties. With stagnant rent growth over the past decade, tenants will find rents at the new properties comparable with office buildings developed in the late 1990s. It will be interesting to see just how aggressive landlords are to make a deal over the next few years.

There are plenty of bright spots. Buckhead is still a destination submarket and is still capable of drawing the highest rates in Atlanta. Tenants want to be there for a reason. The area also boasts Atlanta’s finest retail amenities and best restaurants as well as two MARTA stations and the improved Peachtree Road thoroughfare. In a sign of the times, Tishman Speyer is building a pedestrian bridge across Georgia State Route 400, linking the Buckhead MARTA station to Two Alliance.

For tenants, it’s a great time to be in the market for Buckhead office space.

Other submarkets cause more consternation when looking at the future, primarily due to a limited amount of current construction. Overall, year-to-date negative absorption is at a little more than 265,000 square feet, but average rates have held steady at $21.06. Similarly with Buckhead, developments such as Dewberry Capital’s Two Peachtree Pointe, Barry Real Estate Cos.’ Allen Plaza and AIG and Carter’s Atlantic Station have left neighbors with significant blocks of empty space. Invesco was lured to Two Peachtree Point; Georgia Power and Ernst & Young went to Allen Plaza; and BB&T, Womble Carlyle, Ford & Harrison and Nelson Mullins Riley & Scarborough all went to Atlantic Station. Still, each of those developments has created its own sense of dynamism as well as a number of landmarks on Atlanta’s skyline.

Central Perimeter took a beating at the beginning of this decade after the tech bust and the events of September 11, but the submarket has emerged as perhaps Atlanta’s healthiest. Newell Rubbermaid has leased the entire Three Glenlake building for its headquarters, and Wells Real Estate Funds recently acquired from its development joint venture the property that included Greenstone Properties, Pope & Land and Granite Properties. The fallout from the residential lending crisis creates some concern, as it does across all submarkets, but a number of developers have sites prepared for new development as the economy rebounds.  Given its recent history, Central Perimeter could support one or two new office buildings, and developers such as Cousins, Ackerman & Co., Hines, The Griffin Co. and Highwoods Properties have their fingers on the market pulse, ready to begin construction once the market dictates demand for new space.

A small amount of new construction in the past few years may create opportunities in the Northwest. Shailendra Group, one of the most active developers across metro Atlanta, has begun construction of 2255 Cumberland Parkway and is seeking rates of $28 per square foot. Ultimately, we think they’ll achieve those rates, and they’ll need to, given the underlying construction and land costs. Nearby, Seven Oaks and GE Asset Management are seeking rents around $31 for a new Class A building at U.S. Highway 41 and Cumberland Parkway. With Class A rents in the Northwest submarket averaging $21.01 and a vacancy rate of 16.4 percent, it will be interesting to see how far new development can push rates higher.

— Scott Amoson is research director at Colliers Spectrum Cauble in Atlanta.

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