Simply The Best: Atlanta Trophy Offices Breaking Price Records In Shallow Market

Investor hunger for new office towers with tenants in hand has pushed per square foot prices in Atlanta to record levels this year.

Blackstone set the city's new pricing record in May when it purchased the majority interest in the Anthem Technology Center tower in Midtown for $719 per SF, according to Transwestern data. That sale topped the previous record Stockbridge Capital Partners set when it purchased Three Alliance Center from Tishman Speyer in 2018 for $533 per SF. 

More than $1.42B in 16 office buildings traded hands in Metro Atlanta during the first half of 2021, according to CBRE, nearly triple the $490.8M of sales during the same period in 2020.

“I think quite frankly that there are a few trades that will take place … that will eclipse the numbers you've already seen this year,” CBRE Vice Chairman Will Yowell said.

Office Properties Income Trust's purchase last month of Twelve24 — a 346K SF tower in Central Perimeter — also eclipsed Three Alliance's three-year-old record when it traded for $582/SF.

Other major sales this year include Starwood Capital Group's purchase of Stonebridge I, II and III in Sanctuary Park in Alpharetta for $134.7M, CP Group and Farallon Capital Management's joint purchase of One and Two Ravinia Drive and One Overton Park for nearly $220M and Ardent Capital's purchase of the four buildings it didn't already own at Piedmont Center office park in Buckhead, for which it paid $106M, according to Transwestern.

Since the coronavirus pandemic, industrial and multifamily have become the belles of the ball for investors in Atlanta, driven to the Southeast due to the region's job and population growth. When it comes to office, investors are focused on the metro area's trophy assets with rent rolls that are stabilized or value-add plays.

“There's a rush to quality on the office side,” Newmark Senior Managing Director Daniel Matz said. “We're seeing this in Atlanta and Miami and Los Angeles and Seattle.”

Behind the headlines about record pricing, though, experts say is a dearth of product actually for sale in Metro Atlanta, despite the flood of capital searching for deals. Landlords who have properties with upcoming lease expirations have been unable to get the prices they want, which has many office landlords holding off on selling their properties right now, OA Development partner Steve Berman said.

“At the top of the market, there's no shortage of capital. Those are great deals,” Berman said. But for buildings not at the apex of the market, “sellers are working with a pre-pandemic set of pricing expectations and buyers are looking at the marketplace as more of a value-challenged asset class. So there's not a great matchup between the two and as a result, we're not seeing many transactions taking place.”

Yowell said investors are waiting for more clarity on just how much the work-from-home and flexible office movements will impact tenant demand, which for now has widened the gulf between buyers and sellers of office assets. CBRE anticipates that companies across the nation may shrink their office footprints by as much as 10% due to the impact of flexible work schedules, Yowell said.

That uncertainty is driving up the prices investors are willing to pay for Atlanta's trophy towers, while tamping down on the pricing for office buildings with near-term lease exposures.

“Investors ... are uncertain of what the assumptions should be in what they need to put into their model, given the potential of work-from-home,” Yowell said.

A handful of office buildings seeking $25M or more are up for sale. Brookside 100, a 130K SF building at Brookside Concourse in Alpharetta, and The Quad at Johns Creek, two buildings totaling nearly 500K SF in North Fulton, are on the market, according to CoStar data provided by Avison Young. JLL is also marketing 100 Peachtree, a 623K SF tower in Downtown Atlanta for an undisclosed sum.

OA Development is under contract to sell an office property with a tenant under lease for the next 14 years, Berman said, but investor reticence toward the more middle-of-the-road office product led OA to cancel plans to sell other buildings in its portfolio earlier this year.

“We've tried to transact a number of times … to sell assets and haven't been successful in attracting a robust group of buyers,” he said. “If you don't have a gun to your head and you don't have to sell, then just wait.”

OA Development, which owns more than 2M SF of office space throughout the Southeast, is about to test the waters with another building that is not as stabilized, Berman said, hoping that tenants' space needs will become more clear after Labor Day, when the industry expects a flood of employees to return to the office full time.

Avison Young Research Manager Sara Barnes said companies are now beginning to decide what they need, spurring on Atlanta's leasing market.

"Most multi-tenant buildings are starting to see more activity than they have been," Barnes said.  

Berman said he believes that corporate America will return to something close to pre-pandemic office usage after remote workers realize they are missing out on advancement opportunities.

“This whole idea of being a Zoom corporation is a fatally flawed vision,” Berman said. "My thinking is, and we're already seeing it, is they'll come back needing more space."