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Despite Lost Tenants, Highwoods Remains Bullish On Growing Buckhead Rents

Could losing two office tenants in Buckhead be a good thing for Highwoods Properties? Executive vice president Ted Klinck seems to think so.

Lobby of Two Alliance Center in Buckhead, owned by Highwoods Properties

Highwoods plans to backfill two tenant spaces in Buckhead and achieve rents 10% higher than what the REIT is earning now, Klinck said Thursday during an earnings call with stock analysts. CEO Ed Fritsch later in the call identified those tenants as human resources consulting firm Towers Watson, vacating Two Alliance Center, and Morgan Stanley, moving out of Monarch Tower.

At this point, Highwoods' Buckhead portfolio — which includes One and Two Alliance Center as well as both Monarch Plaza and Monarch Tower — has rents that are 15% below those at Buckhead's newest trophy tower, Three Alliance Center, said chief financial officer Mark Mulhern. He said Highwoods looks to achieve rents in the high $30/SF range.

Total square footage of both users was not disclosed, although Klinck said the largest space being vacated is 51K SF, which will be empty by 2018.

Rendering of the FBI's new Southeast headquarters in Chamblee

While Fritsch said activity in Buckhead was good so far this year, he added that Highwoods does not have "strong prospects" yet to lease up Morgan Stanley and Towers Watson.

"We feel very confident. We're going to be able to re-lease those in a reasonable amount of time,” he said.

Klinck also told analysts that he did not expect much fallout from Coca-Cola's planned 1,200-employee layoff, even as the soft drink giant was a key contributor to an overall negative absorption in the office market during the first quarter of this year. Coke is leaving more than 322K SF at 2500 Windy Ridge in Cumberland/Galleria, consolidating operations into its Downtown Atlanta headquarters.

“A lot of their staff is in their owned headquarters building, as well as a long-term lease they've got Downtown,” he said. "So I am not sure there is going to be a ton [of] other impact in the Atlanta market."

Another big tenant loss for Highwoods is the FBI, which is expected to leave 135K SF at 2635 Century Pkwy. — part of Highwoods' Century Center office complex, Klinck said. The FBI is finishing a 150K SF build-to-suit with FD Stonewater in Chamblee, where it will consolidate its Southeast operations.

Riverwood 200, now 80% pre-leased, is a project in a joint venture between Highwoods Properties and Seven Oaks Co.

Highwoods' portfolio saw some key successes as well, including:

  • Achieving nearly 80% pre-leasing at its $107M Riverwood 200 development, with tenants including Bennett Thrasher and Holder Construction.
  • Leasing 43K SF at 5000 CentreGreen in Raleigh, achieving some 26% pre-leasing, with officials seeing another 13% of its total square footage in prospects.
  • Winning the assignment to develop the $96M, 224K SF headquarters for Mars Petcare at Ovation in Nashville, a planned, 1.4M SF mixed-use project.

“The slow, steady cadence of positive economic growth has given us an economic cycle [of] a longer duration than most prior cycles. Therefore, we expect more at-bats,” Fritsch said. “Our view is customers and prospects are generally comfortable about growing their businesses, whether it's an existing customer needing to expand or a build-to-suit prospect looking to relocate and/or consolidate multiple locations into one modern-day facility.”

Fritsch said he predicts that Highwoods could announce between $126M and $220M in new build-to-suit or anchor-driven office projects in its development pipeline.

“Development continues to be a core competency for us and an ongoing engine of strengthening cash flow and earnings growth,” he said.