The bad news: Class A vacancies are at 25%; class B, 18.4%; and class C, 15.9%. The good news: New construction has finally slowed, allowing completed space to be rented and net absorption to rise.
That's the prognosis of Erik Pawloski, research director at locally based Bullock Mannelly Partners Inc. "The most significant trend that will help the market is a drastic reduction in the amount of new space being brought to market," Pawloski tells GlobeSt.com.
That trend has already started. The end of the construction boom in 2000 brought six million sf of new office space to the local market. That supply was followed by five million sf in 2001. One million sf was added in 2003. "Years of over-zealous building and worsening vacancy rates have led to nearly a stoppage in new construction activity," Pawloski says.
Midtown is emerging as the new urban area in the city, the researcher says. Average asking class A base Midtown rents of $23.68 per sf already equal rents at trendy Buckhead, the luxury condo, office and entertainment district eight miles from Downtown. Midtown garnered 77% of the total one million sf under construction in 2003.
On the leasing front, Northwest Atlanta, the largest submarket, had the greatest positive absorption of 503,875 sf. The second largest submarket, Central Perimeter, recorded the worst negative absorption of 717,681 sf. "With over 34 million sf of vacant space, tenants continue to negotiate favorable lease conditions," Pawloski says.
Rents are down by 1.9% to an overall average asking base rate of $19.02 per sf. Only Midtown and Northwest Atlanta saw fractional rate increases. Midtown went to $23.68 from $23.49; Northwest Atlanta, to $22.39 from $22.37.
On the capital markets front, cap rates "continue to fall as investors use other methods to evaluate overall property values," the Bullock Manley researcher says. "With steady to decreasing NOIs and with the cost of money being low, many investors are predicting that operating incomes will increase as the economy improves."
Additionally, Pawloski says "Many investors believe that current cap rates do not accurately reflect the future potential value of a property and therefore, are willing to pay prices higher than those calculated by using historical cap rates."
The researcher predicts the market will see lower cap rates "as investors continue to buy office property and prices per sf hold steady."
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