Jeff Shaw, Fairlead Commercial Real Estate
Although Atlanta was slower to rebound from the recession than many U.S. markets, it was only a matter of time before the city’s numerous strengths — including its low cost of living, pro-business environment, excellent labor pool, above-average household income and strong university systems — placed it on a path of sustained recovery.
The Atlanta office market has posted 13 consecutive quarters of occupancy gains. Strong absorption and limited development are exerting upward pressure on rental rates, particularly in the Class A market.
There are also some significant new trends. While there was previously a clear “flight to quality” that enabled tenants to take advantage of rent bargains and concessions at Class A properties, diminishing space options and the pricier rental rate environment are causing tenants to consider Class B properties as a more economically viable alternative. Still, it is yet another sign of the overall recovery in Atlanta’s office sector that we are seeing an increase in rental rates and a decrease in landlord concessions in the Class B sector as well.
The rebound of Atlanta’s office sector is not lost on investors. Strong tenant demand and the rise in rental rates are drawing the attention of both small and large investors, even those that have historically focused on gateway markets such as New York, Boston and Washington, D.C.
Recent trophy sales — including the sale of the 34-story “King and Queen” office towers in the Central Perimeter submarket, and the 424,000-square-foot Pinnacle and 278,000-square-foot Two Live Oak buildings in Buckhead — are proof that larger investment firms believe in Atlanta’s current success story just as much as the smaller, entrepreneurial firms do. These sales also demonstrate that investors are more confident that the recovery cycle is firmly entrenched.
Overall, Atlanta is now on the radar of an increasing variety of investors, including international investors, REITs, pension funds and life companies. Institutional investors strongly favor Buckhead and Central Perimeter, which are experiencing the strongest sustained absorption and rental growth.
Although most submarkets are experiencing rental rates that are at historical highs with limited new product in the pipeline, there is still a significant rental rate spread between existing Class A buildings versus the new properties coming on line. An exception is Buckhead, where rental rates in existing Class A properties have risen to a level closer to the pricing for new buildings, which is boosting the confidence of both developers and investors in that submarket. The favorable conditions have spurred the development of a signature tower — Tishman Speyer’s 30-story, 500,000-square-foot Three Alliance Center, which is the first speculative tower developed in the market since 2008.
Our firm is also bullish on the Northwest, North Fulton and Central Perimeter markets. We are currently tracking 4.3 million square feet of prospective tenants whose requirements include high-parking capacity, proximity to labor pools and clients, and, in some cases, government incentives.
Midtown and, to a lesser degree, Downtown are seeing a significant increase in demand from technology and other creative companies whose Millennial employees are attracted to the urban lifestyle and amenities available in Atlanta’s lively intown neighborhoods. One example of the strong demand from technology companies, and one of the biggest deals of the year to date, is technology company NCR’s announcement that it will move to a newly developed corporate campus of up to 400,000 square feet in Midtown. Also in Midtown, Ponce City Market, a 1.1-million-square-foot redevelopment of the historic Sears building, has attracted elite tech firms such as Twitter, MailChimp and athenahealth, and may soon be adding Google to its roster of tenants.
In the most recent jobs report from the U.S. Bureau of Labor Statistics, Atlanta posted a 4.6 percent increase in employment growth — the largest jump among large U.S. markets. Amid this improving economic environment, the positive momentum will continue in Atlanta’s office market, along with heightened interest from an array of investors that now have Atlanta in their sights.
— By Jeff Shaw, CEO, Fairlead Commercial Real Estate. This article originally appeared in the May 2015 issue of Southeast Real Estate Business.