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Atlanta's Office Market Steady But Unremarkable In Q3

Atlanta's office market third-quarter performance can be summed up simply: meh.

Midtown Atlanta skyline

Office landlords saw more than 100K SF emptied by tenants in Q3, according to a report by Transwestern. The pace of that leasing has been uneven, with most of the brunt of negative net absorption being felt in the Class-B asset class. Class-A offices saw more than 100K SF of positive absorption.

The Q3 numbers show that 2017 continues to be an uneven year for the office market, with the first quarter ending in the red but the second quarter seeing more than 400K SF of positive absorption.

“It seems to me what's going on is simply that we have a fairly modest economic expansion that is not driving a significant increase in office jobs,” Ackerman & Co. President Kris Miller said. “We're kind of in this continuing, modest net absorption phase.”

Ackerman & Co. President Kris Miller

While the Economic Forecasting Center at Georgia State University is predicting Metro Atlanta companies will add some 65,500 jobs this year, only 17,400 of those positions are considered premium, or jobs most likely located in an office, according to Atlanta Business Chronicle.

Transwestern Senior Research Manager Keith Pierce said there is another dynamic taking shape that is influencing the numbers: consolidation. Companies continue to shrink their office footprints to put more employees in less space. But unlike during the Great Recession, when companies reduced office as a defensive, cost-saving move, companies are reducing footprints because of changing layouts and more efficient uses of space, Pierce said.

“We have seen slower demand in Atlanta during 2017 than in the previous year as users sort out their needs and react to rising rents in tightening markets,” he said. “Until we see more data, we see this as a blip in demand as owners and tenants adjust to changing workplace dynamics.”

Not all of Atlanta was sluggish.

The belle of the leasing ball continues to be Midtown, which has posted more than 180K SF of positive absorption so far this year, according to Transwestern. Landlords also continue to push up rental rates in the most tony of office towers. Atlanta's overall office vacancy rate was 16.4%.

Class-A office rents continue to trend upward in Atlanta

According to a JLL report, Atlanta Class-A office rates passed $30/SF for the first time in the second quarter and climbed by another dollar per SF in Q3. Midtown Class-A properties jumped $1.80/SF, finishing at $34.36/SF, surpassing lease rates in Buckhead, according to JLL. And while developers are building 3.1M SF of new office, they have already pre-leased more than a third of that space. 

“Our team is very busy right now. We're working on some nice-sized pursuits,” JLL Managing Director Jeff Bellamy said. “Some submarkets are a little bit slower than others. I think we're relatively steady.”

Some surburban office markets are beginning to see larger deals, such as North Fulton, where brokers are shopping some 500K SF in potential office deals.

Miller is not bearish in the near term. Activity will not match what the market saw in 2014 and 2015, but at that time, the economy was finally getting its footing from the recession, and there was a lot of pent-up demand, Miller said.

“I don't think the story here is that office is bad,” he said. "I think office will continue to be positive, but not as strong."