SOUTHEAST SNAPSHOT, OCTOBER 2010

Atlanta Office Market

Atlanta, like other major U.S. cities, is in the midst of what some economists say will be a very slow recovery. Following five straight quarters of negative absorption, 2010 began favorably with a first-quarter positive absorption figure that restored a sense of optimism for the remainder of the year.  The second quarter, however, put us back in the red with 295,668 square feet of negative absorption, resulting in 242,142 square feet of negative absorption through mid-year.  Overall vacancy rates have increased to 19.68 percent, up 0.21 percentage points from the first quarter of 2010 and up 2.46 percentage points from this time a year ago. This marks the highest vacancy rate the city has seen in more than two decades.  Average rental rates continue on a downward trend despite having 1,640,816 square feet of trophy Class A space delivered during the first quarter. Average rental rates decreased from $21.65 per square foot at mid-year 2009 to $21.42 per square foot at mid-year 2010. Nationwide, Atlanta falls just below the average rental rate of $21.73 per square foot.

Buckhead, which has delivered nearly 3 million square feet since 2007, currently has the most available square feet of any submarket with 4,384,685 square feet and also has the highest average rental rate of all submarkets at $26.18 per square foot.  Midtown follows with an average rate of $25.98 per square foot. Downtown remains the most affordable option in the urban corridor with an average rental rate of $21.58 per square foot.

Buckhead accounts for one third of the urban market and makes up 11.3 percent of the overall Atlanta office market. A closer look reveals an unprecedented 28.72 percent vacancy rate in this submarket, although this is down from 29.06 percent the previous quarter. Vacancies in Buckhead were driven by the delivery of four new Class A towers and have nearly doubled since the beginning of 2009, when the submarket posted 15.31 percent vacancy. However, Buckhead was the leading urban area in total space absorbed during the second quarter of 2010 with 52,496 square feet. This is a positive trend that we hope to see continue as new trophy Class A towers continue to fill up, some with space already pre-leased. Located in the heart of Buckhead, the 3344 Peachtree Road building is one force behind this positive absorption. Since its delivery in the second quarter of 2008, this 496,921 square foot giant has already reached 94 percent occupancy. Anchored by the arrival of the law firm of Weinberg, Wheeler, Hudgins, Gunn & Dial, the building has jumped from 78 percent occupied to 94 percent occupied during the second quarter alone.

With close to 3 million square feet delivered during the past year and the overall average vacancy rate approaching 20 percent, new construction has been brought to a standstill. Over the last decade the Atlanta urban market has averaged over 1 million square feet of deliveries per year. Since the three new deliveries in the first quarter of 2010 ─ Phipps Tower, 3630 Peachtree, and 12th & Midtown ─ there has been no office buildings over 50,000 square feet under construction. Although the lack of new construction is positive and should benefit the Atlanta office market long-term, it is uncertain how quickly absorption can catch up.  As commercial contractors scramble for new business, many have turned toward other areas such as healthcare, high-tech data centers, educational facilities and hotel renovations.  For instance, Winter Construction Co. and the Hyatt Regency located in Downtown Atlanta recently began a $60 million face-lift of the iconic hotel, which first opened its doors in 1967.

Employment remains stagnant throughout the Atlanta MSA with a 10 percent unemployment rate, exceeding the national average of 9.6 percent for the 35th consecutive month. Still, Atlanta remains one of the fastest-growing cities in the country and has attracted several Fortune 500 companies in recent quarters. According to the Metro Atlanta Chamber of Commerce, KPMG recently indexed Atlanta as having the lowest business costs among the nation’s top 10 largest metro areas. And while overall rental rates don’t appear to be declining sharply, our data suggests that concessions continue to increase. Landlords are quick to offer free rent, building signage, free parking and generous tenant improvement allowances in order to secure occupancy in their buildings. This, among many other factors, is perhaps why Atlanta continues to attract new business like the recent relocation of NCR and First Data Corp. Our outlook for the remainder of the year and going forward into 2011 is hopeful despite the difficulties with the national and regional economies and their negative impact upon the office market.

— Jonathan Majors is Director of Research with Atlanta-based Richard Bowers & Co./TCN Worldwide.

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