“Despite the slightly improved leasing and lower availability rates, Atlanta still has a great deal of excess supply that will take years to absorb.” So states Studley, Inc., in its second-quarter report on the local market. The comment sets the tone for the observations contained in this report. Absorption, while positive overall, has been uneven. The vacancy rate has hovered above 20.0% for the past two years; by Reis’ count, nearly 30 million square feet stood vacant as of mid-year. And rent growth remains weak. Notes Jones Lang LaSalle, “Overall leasing activity in metro Atlanta has still not shifted out of low gear and the volume of office rental transactions recorded so far this year has been clocking in at a laggardly pace.” Construction of standard competitive space, meanwhile, has ceased. Reis reports only a small handful of medical office, office condo, and owner-occupied facilities under way. One moderate-scale spec project, however, is lining up.
On the other hand, net absorption’s steep slide into negative territory has come to an end, and job growth has resumed in substantial volume in office-using sectors (see Special Real Estate Factors). Further, the local market outperforms the nation with its lower-than-average sublease availability. These factors likely augur well for the future, even if the recovery is disappointingly slow.
The sharp cutoff of construction activity stands as strong testimony to the effects of high vacancy and other recessionary factors on the local market. Vacancy breached the 20.0% threshold in second quarter 2010—for the first time since the mid-1980s. With demand positive overall but uneven, the vacancy rate has executed a slow overall descent through recent quarters. Thus, second quarter’s 20.8% was up 20 basis points from the quarter before but was down 30 year-over-year. Reis
expects the rate to slip below 20.0% sometime next year. At 29.7 million square feet, meanwhile, the volume of stock standing vacant as of mid-2012 suggests the degree of the market’s current difficulty. Still, the local sublease issue has improved. Sublease space accounted for 9% of total quarter-end vacancy, about 2.7 million square feet. The national rate, for the sake of comparison, was 11%.
The “flight to quality” trend typical for stressed markets has been apparent in Reis’ data on Atlanta. Despite a setback during the latest quarter, the 19.5% mid-year Class A vacancy rate, up 50 basis points for the period, was down 30 year-over-year. The upscale Buckhead and Midtown submarkets, with their attractive spaces and high vacancies, have been chief beneficiaries of the “flight.” The Class B/C rate, notably higher at 22.8%, ended the latest quarter down 20 points for the period and year-over-year as well.
SUPPLY AND DEMAND
As indicated elsewhere in this report and by the history of the market itself, Atlanta’s relatively low occupancy costs alongside those of other major U.S. markets are an encouragement to expanding and/or relocating corporations, many of which have come to the area over the years and a few of which have arrived recently. Also encouraging is the recent positive job growth in the office-using sectors. As noted in Special Real Estate Factors, expansion in the tech, health-care, and educational sectors is contributing to the absorption of office space. In addition, a relocation by State Farm will occupy a vacant 434,500-square-foot building in the north suburban Central Perimeter area, adding 500 customer service employees (see the Submarkets section). This is one of several recent significant deals in the Central Perimeter area.
These trends have helped the market return to the path of positive net absorption following the 4.95-million-square-foot negative net recorded over the three-year span ending with 2010. The more recent performance, however, has been neither robust nor uniformly positive. The plus-side total recorded for first quarter this year was followed by negative net absorption at 285,000 square feet during second quarter; the year-to-date net through mid-year, accordingly, was negative 125,000. While Reis expects a positive total over the remainder of the year, a sum barely greater than 400,000 square feet is projected for the year-end count—on the heels of 2011’s anemic 208,000. On a slightly brighter note, no general purpose, multi-tenant office space completed construction last year.
Indeed, with the market still in the process of absorbing the large volumes of space delivered earlier in Buckhead and Midtown (in particular) and elsewhere, speculative construction has come to an end. With the exception of a 600,000-square-foot owner-occupied corporate complex under way for Cox Communications in the Central Perimeter area and a 344,500-square-foot single-tenant facility for Primerica, Inc.—and about 150,000 square feet all told in two medical office buildings and an office condo project—no office space was under development metro-wide as of mid-July.
“Given the soft market conditions,” writes Studley, Inc., “most landlords have had little leverage to increase rents.” Reis’ data bear out the observation. Measured by the year, rental losses in 2009 and 2010 were followed by small increases in both the average asking and effective rates in 2011. The sluggish pace has continued. At $21.39 psf and $16.89 psf, asking and effective averages for second quarter 2012 were up 0.1% each from the
quarter before. The respective year-over-year gains were 0.9% and 1.1%. “Landlords have dialed back concessions a bit, particularly in the highest-caliber buildings,” notes Studley, Inc., “but most tenants, particularly larger creditworthy tenants, can still negotiate very favorable lease terms.”
“Class A asking rents have seen upward movement this year, suggesting that confidence is returning for landlords in the Class A market,” reports Cassidy Turley Commercial Real Estate Services. Reis puts the second-quarter Class A asking average at $24.33 psf, up 0.1% for the quarter, up 0.9% year-over-year. Gains over these time spans for the Class B/C mean asking rate, reported at $17.20 psf for the latest quarter, were 0.2% and 0.9%. “The pendulum has not … fully swung into landlord-favorable territory yet, and tenants are still able to find deals depending on the building and location,” notes Cassidy Turley, “but Atlanta is gradually beginning to see conditions move toward a landlord-tenant neutral market as recovery persists.” Jones Lang LaSalle observes that “most of the metro’s best addresses can still be had at a discount.”