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Atlanta Office Market Breaking Price Records As Values Soar

As Atlanta's office rents reach all-time highs, so have the prices investors are paying for them.

Piedmont Office Realty
Galleria 100, the 18-story office tower within the Atlanta Galleria Office Park

Metro Atlanta is on track this year to log the highest ever average per-square-foot price for Class-A offices, according to Transwestern research. As of August, office buildings throughout the metro area traded for an average of $244.30 per SF, up from $229 per SF the year before and up 28% since 2014, Transwestern Director of Research Keith Pierce said.

Since 2010, the metro area has posted more job gains every single month than the same month the year before. In June, the metro area tallied 53,500 new jobs, a 1.9% increase from June 2018. The area's population has surged to fill those jobs, growing by nearly 98,000 new residents a year since 2010, according to the Atlanta Regional Commission.

Job growth has helped office landlords fill space and push up rents, breaking the $50 per SF ceiling for the first time in the newest buildings.

“That has drawn capital from a lot of places,” CBRE Vice Chairman Will Yowell said. “Quite frankly, Atlanta has been one of the stronger markets from an investment sales perspective this past couple of years.”

Many of the top office sales so far this year have easily broken through the $300/SF level, including Starwood Capital's purchase of One and Three Glenlake office buildings at $320 per SF, KKR's purchase of the Salesforce Tower on East Paces Ferry Road in Buckhead at $325 per SF and Northwood Investorsacquisition of 715 Peachtree at $390 per SF. 

Two recent transactions broke through the $400 barrier.

First, Cousins bought out its joint venture partner at Terminus 100, JP Morgan Asset Management, in a deal that valued the 1.2M SF property at $412 per SF.

Then, this week, Stockbridge Capital Group shelled out $23.8M for The Willoughby, a 60K SF loft office project with a price tag of $407/SF, the Atlanta Business Chronicle reported. Stockbridge is the same outfit that set records in Metro Atlanta when it purchased Three Alliance Center from Tishman Speyer for a record $525/SF in 2018.

Transwestern
Transwestern Director of Research Keith Pierce

Pierce wrote in an email that sudden global economic uncertainty, coupled with a desire for stronger returns on investment dollars, is driving capital to commercial real estate as a whole.

"This has created even stronger demand for high-quality product that will hold or increase its value in the coming years," he said. "The competition for these properties is also pushing prices upward."

Atlanta is not the only city experiencing an influx of capital. Its job-growth peers, like Dallas and Phoenix, are also luring investor dollars into the office market, Pierce said. Fund managers are being cautious about spending capital in cities that may already be at price peak.

“Investors see opportunities for more favorable pricing in markets that offer strong economic fundamentals,” Pierce said. “For instance, Manhattan Class-A prices currently average more than $980/SF, four times the Atlanta average.”

Average values have been gradually rising since the depths of the Great Recession in 2010, when only two office buildings traded hands at an average of $83.85/SF. By 2015, office prices passed the $200/SF mark for the first time since 2008, and have only increased since.

Childress Klein Managing Partner Gordon Buchmiller said there is another factor that also is driving up the price tags for office buildings: construction costs. While costs to build office buildings range anywhere from $120 to more than $200 per SF throughout the U.S., trophy towers in top markets easily surpass those costs.

Even in Atlanta, construction costs have become the boogeyman when it comes to justifying a new project, with annual increases of more than 5% a year since 2004, according to a recent CBRE report.

That affects a building's replacement cost, or how much it would cost in today's construction dollars to replicate the same building. That alone is giving investors the comfort to pay higher prices for Atlanta real estate, Buchmiller said.

“Replacement costs for an office building [have] also increased faster than any time I've seen in my career,” Buchmiller said.

Most recently, Childress Klein sold its Galleria 100 tower in the Cumberland/Galleria submarket to Piedmont Office Realty Trust for $95.1M, or $228/SF. That price still pales in comparison to what it would take to build it new today.

“The cost to reproduce that building today would probably be $450/SF. That makes someone like Piedmont feel very, very comfortable about their basis,” he said.