Atlanta Office Is So Red-Hot, CRE 'Is Pinching Itself To See If This Market Is Real'
Two and a half months into 2018, Atlanta's office market continues to show momentum with companies gobbling up more than 840K SF since the calendars turned.
It is a strong start to a year that many real estate pros believe could be even better than 2017, when the market as a whole absorbed some 800K SF in 12 months, according to Colliers International. And it is a reversal of fortune from what happened during the first quarter of 2017, when Atlanta office landlords actually saw companies give up 81K SF of space, according to Savills Studley.
“Atlanta's real estate industry is pinching itself to see if this market is real,” Cushman & Wakefield Executive Director Ken Ashley said in an email. “Velocity in Atlanta's office market is at a torrid pace. There is robust demand for space by companies of all sizes and from a variety of industries. Expansions are as common as millennials noshing on avocado toast.”
“We're seeing a lot of activity this first half of the year for sure,” Colliers International Atlanta CEO Bob Mathews said. “I think there's just a general [sense] that companies are expanding, they're growing. There are some new companies out there that have come into the market. And we're competing on a couple of nice-sized deals.”
Among the bigger deals in the market so far this year include the headquarters for Colonial Pipeline; law firms Smith, Gambrell & Russell and Jones Day; telecom giant T-Mobile; insurance giant AIG; tire maker Goodyear, which is eyeing Atlanta for an operations support center; and coffee giant Starbucks, which is reportedly eyeing adding a large office in Metro Atlanta.
“Atlanta’s large pool of diverse tech talent and lower cost of living continues to drive growth, with a number of technology and consumer product firms, including Pandora and Goodyear, currently scouting the city to expand their presence significantly,” JLL Executive Vice President Adam Viente wrote in an email.
In one recent deal, Primrose Schools inked a lease for more than 35K SF at the Towers at Wildwood Plaza, a more than 700K SF office tower in the Cumberland/Galleria submarket. The deal doubles the school's headquarters size. The school system is moving into space that was formerly occupied by Coca-Cola, which, ironically enough, consolidated into the city.
After some soul searching, and talks with longtime staffers, Primrose CEO Jo Kirchner said the company elected to move the day care operator's headquarters from Acworth — where it has been for the better part of a decade — to Wildwood Office Park, some 20 miles south, and only a short hop along Interstate 75 to the heart of the city.
For Primrose, the move closer to the heart of Atlanta was as much about expanding office space as it was about recruiting talent.
“Technology and marketing are the two areas where we are really going to be expanding staff, and [those workers] live in the city,” Kirchner said. “We are recruiting nationwide as well. In some of those positions, people wanted to live closer to the city.”
Basking In A Landlord's Renaissance
The level of leasing success in Atlanta has come with a price, at least for tenants. Landlords are still celebrating with rising rent growth that is giving some tenants sticker shock, Mathews said.
Some companies could be in buildings where, the last time they leased space, rents were in the $20/SF range. Today, some buildings — especially those in submarkets like Midtown, Buckhead and even Central Perimeter — are seeing rents exceed $30/SF, Mathews said.
“[Some companies] understand they can't rent at $25/SF,” he said. “And I think rents will stay steady, if not rise a little bit this year.”
It is not just rents that are rising. The value of tenant improvement allowances is giving tenants less than what it may have provided for in years past thanks to rising construction costs, CBRE Senior Vice President Dale Lewis said.
“$50[per SF in TI] just doesn't go that far anymore,” Lewis said.
That is making some established companies, especially those that may not be expanding, decide to stay where they are instead of moving. But if a company needs to grow, then they will confront the new reality of higher prices, he said.
In real estate parlance, that is known as a landlord's market. Lewis said the tightening office market is not ending anytime soon, which will continue to give landlords the edge on rents.
“I think this one's very sustainable,” he said.
Ashley said many companies also are flocking to the higher-priced submarkets within the city over the war for talent.
“Many younger employees want to be located in areas that have chef-driven food options, original retail and office buildings made of authentic materials,” he said. “New Urbanism is all the rage. Today's reality is you can live, work, play and be shot as an extra in a movie. All on foot.”