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Experts: Atlanta Office Should Continue Healthy Trend With Little Spec In 2018

Lack of new office development, and a robust pipeline of companies seeking office space, could push Atlanta's record office rents even higher in 2018.

Midtown Atlanta skyline

Office rents in Atlanta have reached levels never before seen in the market. According to a recent Colliers International report, the average rent is nearly $24/SF, representing the 16th consecutive quarterly rent increase.

Midtown Atlanta's submarket reigned when it came to rents this year as well, eclipsing Buckhead with some rents hitting as high as $50/SF.

Colliers is tracking up to 11M SF of office deals in the Metro Atlanta market that could put pen to paper in 2018, Colliers Director of Research Scott Amoson said. That, plus dwindling vacant office space, should help record rents.

"We do believe there will be rent growth next year," The Ardent Cos. Managing Director Scott Werbel said.

Rents have grown, despite there being an even balance between new office supply and demand. Leasing activity this year has been a roller coaster, with the start of 2017 and the third quarter on the slow side. But Amoson said office landlords should end the year in the black with 875K SF in positive absorption, keeping vacancy steady at 13.7% despite more than 2M SF of new offices coming online.

The new office supply that is opening — even though much of it is already leased — will pressure rent growth to moderate in 2018, officials said. 

"We expect a more limited increase," Werbel said. 

Highwoods Properties
Highwoods Properties Vice President Jim Bacchetta

Companies Still Hunger For Space

Companies are expected to produce nearly 17,000 office-using jobs next year in Georgia, including 12,500 premium jobs in Atlanta, according to Georgia State University's Economic Forecasting Center.

“I don't see any negatives on the horizon, and in fact, the current level of leasing activity feels a bit stronger than this time last year,” Highwoods Properties Vice President Jim Bacchetta said in an email. "We sense both continuing organic job growth in our portfolio and some new entries to our market."

Avison Young Managing Director Steve Dils said he is optimistic for 2018, especially for Atlanta's overall economy, thanks to continued job growth. 

“Like many of us, I see the length of the recovery and wonder when we will see a downturn. I think we are in uncharted waters due to the relatively slow growth during this recovery and just can’t find a reason to believe it will end soon,” Dils said in an email. “Another way of saying it is that I think we are in the seventh inning, but we are most likely going to see an extra inning game.”

While there have been a quite a few office deals inked in 2017, the velocity was unable to budge the vacancy rates by much, since many companies were simply consolidating space using trends like an open-office design. That has kept demand and supply in balance, according to Colliers.

That is especially true as Corporate America fights for millennial talent by designing space that is appealing to a younger workforce, JLL Executive Vice President Adam Viente said.

“Investment in workplace environments will continue to be a priority,” Viente said. “The economy is trending towards another 18 to 36 months of additional growth. Accordingly, I don't expect to see the competitive environment [for talent] to change.”

What Viente does expect to change is how many people companies are going to be willing to cram into a space. Over the past few years, companies have managed to squeeze from around 300 to 350/SF per employee to less than 100/SF. That is about to reverse, he said.

“Early anecdotal evidence suggests companies have gotten too efficient,” Viente said in an email. "While an open, collaborative environment has many advantages, it also has disadvantages that will lead to companies reevaluating the optimal balance."

Three Alliance Center Buckhead
Three Alliance Center in Buckhead, Atlanta

Spec's Conundrum

Landlords should not expect too much more competition from new office buildings, at least not without significant pre-leasing. That is the issue facing Regent Partners, which has a $400M mixed-use project planned in Buckhead that includes a 45-story office tower, topped by condominiums.

The last significant speculative office tower in Buckhead — Tishman Speyer's Three Alliance Center — had a successful year, nearly filling up its space. It is on the verge to sell for a sum that would shatter Atlanta's per square foot pricing records. But even its success does not lower the hurdles developers need to clear to start a new office building.

“We would certainly like to be in that position, but the financing capital markets do make that challenging,” Regent Partners Director Adam Allman said.

Still, Hines Interests announced plans to break ground next year on an $80M, 230K SF office building called T3 at Atlantic Station without a single tenant in tow. Hines is partnering with Invesco Real Estate and California State Teachers Retirement System on the project, the Atlanta Business Chronicle recently reported.

“We are obviously keeping a very close eye on those future developments and those announcements,” Werbel said.

Ardent has made a big bet on Buckhead by acquiring portions of Piedmont Center in the past couple of years. While all office landlords compete for the same pool of tenants, those with new office projects need tenants willing to pay at least $40/SF in rents to justify development costs, Werbel said.

Add to that increasing tenant allowances — money developers give to tenants up-front to help them build out their office spaces — due to overall construction cost hikes, as well as the expectation that the Federal Reserve will hike interest rates further next year, and that just makes going spec all the more difficult, he said.

Werbel said he is skeptical how deep a pool of companies will be willing to pay rents exceeding $40/SF by the time a new development delivers in 2019 at the earliest.

Atlanta's 2018 office market could change thanks to one major outlier: Amazon's HQ2 project. If the online retailing giant names Atlanta, considered one of the favorites, as home to its $5B second headquarters project, all bets are off for the office landlord market.

“Everything goes out the window if Amazon comes here with 50,000 jobs,” Werbel said. “If it comes here, it's a win for every submarket, regardless of where they actually decide.”