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Special Report: Is ATL Office On The Downward Slide?

Could the Atlanta office real estate cycle have peaked? Are we on the downhill slide? Or are we just being an alarmist Cassandra because things have never been better?


Third-quarter office activity reports from some noted firms in town are painting a muted picture of the Atlanta office market—albeit under the umbrella of Class-A office rates hitting record numbers.

“Yet another quarter of modest activity indicates Atlanta's office market will finish the year at its lowest absorption level since 2011,” Colliers International analysts state in a recent report.

Despite the slowdown, a number of CRE pros—including the author of the Colliers report—say talk of the demise of this office cycle is premature.


“I think we’ve likely peaked, just because I don’t think we are going to see absorption levels over 4.5M SF the rest of this cycle,” says Colliers' Scott Amoson. “But the next couple of years should show pretty solid absorption levels, though, because of the expansions and new requirements that have been signed over the past couple of years.”

Colliers shows that just shy of 300k SF was absorbed Q3 of this year, a 550% drop from Q3 of last year, down roughly 3M SF. That puts the total so far for 2016 at 668k SF.

Cushman & Wakefield numbers were similar, and demonstrated the same kind of trend: Atlanta saw nearly 546k SF absorbed during Q3, helping pump total absorption to 1.1M SF.

“This is well behind the pace of 2015, but with strong leasing activity expected to continue, Atlanta should finish the year at a steady pace,” the report states.

A Submarket Spotlight


The overall numbers do mask what amounts to uneven performance among the submarkets. The clear winners this year so far include Midtown, which absorbed more than 440k SF, and the Northwest—including Cumberland/Galleria—which saw 446k SF absorbed, thanks in large part to Comcast heading to SunTrust Park.

Buckhead also tallied nearly 200k SF of absorption and the Northeast saw some 100k SF, according to Colliers.

But two other submarkets see-sawed in the opposite direction: Downtown, which lost 132k SF, and Central Perimeter, where companies gave back 465k SF. North Fulton also saw more than 150k SF relinquished. For Central Perimeter, the entire year has been spent in the red, Scott notes. 

“At first we thought it might be because the lack of availability was the initial problem, but three quarters in a row suggests otherwise,” he says. “The problem is there isn’t a lot of leasing activity taking place here this year. Additionally, a number of companies have chosen to relocate from the submarket to Cumberland/Galleria, Buckhead and Midtown.”

End Of The World As We Know It?


But does all this mean Atlanta's office market is going downhill? A majority of the CRE pros we spoke with say the answer is a resounding "no." 

“The fundamentals still look too good for any significant dropoff in leasing velocity,” says Avison Young principal Steve Dils. “You hear people asking what inning are we in with regard to the recovery, and the consensus seems to be we are about in the seventh inning. But given the type of recovery this has been, we could very well see an extra-inning game.”


Childress Klein's Connie Engel does see activity slowing, especially in her territory of Cumberland Galleria (despite its strong performance in recent months). But that could be election jitters. Or it could be a blip on the radar.

Unless the economy tanks,” she says, "I don't see any reason why we're going to have any significant slowdown."


“In my view, I think the Atlanta real estate fundamentals have never been stronger” in office, says Seven Oaks Co's Bob Voyles (on left, with Wakefield Beasley's Lamar Wakefield), one of the developers who has pulled the trigger on 100% spec office in today's Atlanta market at 4004 Perimeter Summit, of which he says half should be pre-leased once it delivers in late 2017.

Developers Incredible Discipline


Most say never in Atlanta's CRE history have office developers been this disciplined with adding new supply to the market. Certainly nothing like the last cycle, where some 5M SF in spec office in Buckhead alone had ULI in 2009 say the metro area was in for a “bloodbath.”

Even the Wall Street Journal raised alarms at the time, quoting then-Cousins Properties CEO Tom Bell saying, "This is about as bad as it's been in modern times, and we haven't even seen most of the commercial damage yet.”


This time around, more than 3M SF of new office development is underway, half of which has been pre-leased. Those projects include Comcast's new offices at The Battery at SunTrust Park; Genuine Parts new HQ at Wildwood; HD Supply's HQ; State Farm's regional behemoth in Central Perimeter; NCR's HQ in Midtown; Tishman Speyer's Three Alliance Center in Buckhead; and 4004 Perimeter Summit in Central Perimeter (above).

This is a healthy change for Atlanta's office market, says PM Realty Group's Bill Weghorst.It's not like back in the day where we were delivering 5M SF and only absorbing [3M SF],” he says.


Developer forbearance—whether by choice or by the fact that banks are still gun-shy in granting construction loans for office projects—has led to a renaissance in rents in Atlanta to levels never seen before.

According to Cushman & Wakefield, overall office rents reached $23.38/SF this past quarter, breaking the previous record just a quarter before of $23.07/SF. Class-A has been even richer, with those landlords seeing a 7% jump in rents year-over-year to $33 and change per SF.

And the top-of-the-market rents in Midtown now exceed $33.50/SF. For the better part of three years, Atlanta landlords have seen office rents climb 4%, 5% and 6%, a stark change from the metro area's historical 1.4% growth average in the past 20 years, according to PMRG.

PMRG Managing Director Bill Weghorst

But therein lies the irony. Without argument, there has been a leasing slowdown for office space in Atlanta. And these record rents may partially be to blame.

“It's like if the stock market goes up too fast, it has to take a pause,” Bill says. Atlanta is certainly cheap compared to other major cities, not only for office rents, but for cost of living as well. Yet for companies in Atlanta that have been here for previous cycles, rents north of $30/SF are kind of a startling realization.


JLL's Rob Metcalf notes how rent growth—which has shot up 25% since 2014—is slowing while absorption, though positive, is slowing as well. That slowdown looks to be spilling over into the environment for speculative office here, casting a shadow on the 3M-plus SF of new office space coming online.

“If we removed build-to-suits that are 100% pre-leased, the amount of spec space is 2.42M SF,” Rob says. “This space is only 26.6% pre-leased, which is a sign for cautious development moving forward.”

It's The Jobs, Stupid


What is being built, even spec, is coming at a time when Atlanta is producing new jobs—around 60,000 a year on average. Many of those jobs are in high-skilled areas, which typically use office space.

Unless a catastrophe interrupts the national or global economy, Atlanta’s strong employment and population growth, diversified economy and low costs of doing business will lead to above-average performance,” Bill says.

There certainly could be more job wins to come, says Rich Real Estate's Kirk Rich. And he should know: Kirk also is a board member of InvestAtlanta, the main economic development arm for the City of Atlanta, which has been credited for some stellar wins that have brought big-name companies into the city, including NCR, Global Payments and WorldPay.

“There is a pipeline that continues to be impressive without getting too deep. We have great days ahead,” Kirk says, adding that Atlanta is especially luring in regional HQ operations. “I know what's in the pipeline and it will be very good momentum for a lot of people.”

Ultimately, job growth is office's lifeblood. Now that the metro area has seemingly kicked into gear in that regard, after struggling to start the engine soon after the Great Recession, vacancy rates should continue to shrink, rents rise and the good times continue to roll. Even if we're falling off the peak from last year.

Because as Bob Voyles quips: “Without that, we're just stealing from one another.