The Atlanta office market has continued down a path of steady recovery and absorption, although the pace remains somewhat muted from prior recovery cycles. As outside investors have warmed up to the city of Atlanta, they have been comforted by a safe and positively boring period of growth.
For the last couple of years, investors have been committed strongly to value-add opportunities throughout metropolitan Atlanta, including areas that have historically been out of favor like Alpharetta and Peachtree Corners.
The fundamental improvements in the market rents and occupancy continue to support bullish forecasts for office space in Atlanta with significantly low vacancy and steady rent growth. Atlanta’s office market sits at 12.1 percent vacancy, 6 percent rent growth and 3.6 million square feet of positive net absorption after several years of consistent absorption and falling vacancy.
John Ward, Fairlead Commercial Real Estate
With value-add being a buzz word throughout the Southeast, many investment sales brokers have taken core assets and found ways to present them as opportunities for value-add in an effort to reach a larger pool of investors. Investor appetite continues to be measured and very focused on downside risk versus upside potential. This has inflated the return expectations for very solid real estate, making the investment more of a value-add return. We are seeing a consistent theme of large suburban deals not making a market easily.
Leasing activity and prospective tenant activity are good, but despite fundamentals remaining solid, unfortunately, Atlanta still struggles to compete against many of the major cities due to the new-to-market investors struggle in understanding the nuances of Atlanta’s multiple submarkets and the ongoing issues of traffic. As a result, this has not translated well to an overall desire for many investors to buy more office buildings in Atlanta as we are ending 2016. This has opened up opportunities for savvy local investors to take advantage of some great buying opportunities in emerging and strengthening micro markets.
The financing dynamic has also changed with banks having been whipsawed by new OCC regulations, including risk capital and high volatility commercial real estate (HVCRE) regulations. New CMBS regulations are now requiring that the originators keep a small portion of their loan originations on the books, which has raised costs and lowered leverage from high percentage 60s LTV to low 60s LTV.
Our firm Fairlead, as an organization, has tended to use limited recourse financing in our transactions, and this has helped with our pricing. However, the spreads that used to be at 200 to 215 over LIBOR are now at 250 to 275 over LIBOR and non-recourse financing has had the same widening of spreads. This has not stopped the investment markets, but it has taken some of the steam out of it for sure.
We see Atlanta continuing to move in a steady positive direction, with a strong and more diversified economy than 10 years ago. Commercial office investment will continue to be challenging to those companies that are not well capitalized and able to thrive in the more rule constrained lending environment, but the ability to buy high-quality assets at a very good basis and relative return will remain.
— By John Ward, Chief Investment Officer and Principal, Fairlead Commercial Real Estate. This article originally appeared in the October 2016 issue of Southeast Real Estate Business.