Will Yowell, CBRE
Atlanta is home to 16 Fortune 500 companies and the busiest airport in the world — the recipe for a business boom and hot office real estate sector. According to Georgia State University’s Economic Forecasting Center, Atlanta is projected to add 305,000 new jobs between 2010 and 2016, with a drop in the unemployment rate to 5.7 percent in the same timeframe from the current rate of 7.5. That is a 13.5 percent increase in job growth over six years. The technology, homebuilding and service sectors are returning to health, if not climbing to new heights. According to CBRE’s U.S. Tech-Twenty research report, tech employment in Atlanta rose nearly 11 percent between 2011 and 2013. CBRE Research also finds that Atlanta’s recovery is underpinned by an ever-diversifying number of industries, reflected in the strong job growth across a broad array of sectors.
Atlanta’s post-recession recovery has been a gradual but steady one, which makes for a healthy market. The city’s office sector is more diverse now than ever, as nearly every business sector has a footprint in Atlanta. Adding to the stability, companies are making sustainable decisions in terms of growth.
Atlanta office market sentiment has clearly rebounded as rental rates are up, especially in the top submarkets of Buckhead and the Central Perimeter, and positive absorption has continued, spurring new development in the form of the 500,000-square-foot, Class A Three Alliance Center in Buckhead. The Ponce City Market, Buckhead Atlanta and Avalon developments will add 681,298 square feet of office space upon completion.
The second quarter marked the 17th consecutive one without a new office building delivery in Atlanta. In that quarter, Class A direct office vacancy dropped 60 basis points to 16.5 percent on the strength of 428,000 square feet of net absorption, according to CBRE Research. The overall Atlanta market has experienced four consecutive years of positive absorption since it bottomed out in 2009.
In the next five years, Atlanta’s office market vacancy is forecast to decrease 370 basis points to 13.9 percent while rents should grow an average of between 3 and 5 percent annually during the same timeframe, according to CBRE Econometric Advisors.
“Georgia has been named the top business state three different times since fourth quarter 2013 and Atlanta’s office leasing performance certainly backs that up,” said Bryan Heller, senior vice president at CBRE. “Tenants are looking to renew early and expand before broader rental rate increases. There is also a flight to quality, where walkable amenities and gigabit-capable properties are well positioned. It’s all about recruiting, retaining and engaging the best talent in a competitive world.”
Atlanta’s office investment market has also shown impressive momentum. Continued strengthening in the capital markets, a lack of competitive alternatives and greatly improved leasing fundamentals are stimulating aggressive underwriting and pursuit from major investors. Increasingly, well-capitalized office players looking to sustain yield are moving their focus from gateway markets like New York and San Francisco to Atlanta.
Atlanta’s office investment sales sector averaged $117 per square foot with a 7.71 percent cap rate in the second quarter, according to CBRE Econometric Advisors. The average cap rate coast to coast in the last 12 months was 6.94 percent. In the past six months, 51 office properties have sold in Atlanta at an average of $27.9 million, according to Real Capital Analytics, which ranked the city the 11th most active nationally in the past year.
“Whether the timing is simply right for the asset, their fund is ‘recycling’ capital, their loan is maturing or it is a good chance to book a gain, people are selling office properties,” said Jay O’Meara, senior vice president in CBRE’s Atlanta office. “Buyers from across the investment spectrum — REITs, funds and advisors, off-shore and more — are investing because of a belief in the strength of the Atlanta market. Returns are attractive compared to other investment alternatives or they are simply trying to grow their portfolio as the office market returns to health.”
Atlanta’s recovery is different than that of other areas since the recession. Measured office absorption, a trend emblematic of companies emphasizing greater space efficiencies, has contributed to a more balanced recovery. Noticing the market’s solid performance and lack of volatility, office investors are looking to Atlanta as a smart and stable investment.
— By Will Yowell, Vice Chairman, CBRE. This article originally appeared in the October 2014 issue of Southeast Real Estate Business.