Some tenants who signed leases five years ago are dealing with the sticker shock by choosing to relocate to less expensive, class B properties. A lot of owners are renovating their class B properties to lure tenants from class A properties. We are finding some tenants would rather reinvest the capital in their businesses that they are saving by relocating to class B properties than renew their lease at class A properties.

GlobeSt.com: How will class A deliveries and future development impact class B leasing activity?

Wooten: Historically, new class A office development hurt the class B office leasing activity in Atlanta. This was because development sites in Atlanta were plentiful, construction costs were low and it was easier to get financing for speculative development.

When we were delivering empty buildings in the last real estate cycle, landlords were offering incredible concession packages to get tenants in these new buildings, while absorption numbers were at near all-time lows. Effective rental rates for a tenant at new buildings, after factoring in generous free rent and TI packages, was not much higher than if they stayed at their existing location.

This is no longer the case. With record high construction costs, rental rates have to be close to $45 per square foot and a lot of tenants are not willing to pay this. With more restrictive financing, any new building needs to be significantly pre-leased before it breaks ground. These factors will keep pushing activity to existing class A and class B office.

ATLANTA—Class B direct occupancy experienced a 30 basis point improvement during the fourth quarter to settle at 82.1% and has climbed 50 basis points since year-end 2015, according to PMRG's latest report. Class B asking rents reached a record high, jumping $0.55 to $19.32 during the fourth quarter while moving up 5.0% or $0.92 per square foot over the prior 12 months.

Against this backdrop, GlobeSt.com turned to Zach Wooten, vice president of leasing for PMRG Atlanta, to get some insights into the rise of class B office space in Atlanta in part one of this exclusive interview. Stay tuned for part two, in which he will discuss what types of tenants are most willing to lease class B properties and what landlords of class A office buildings may do to prevent losing tenants amid this wave.

GlobeSt.com: How would you describe the state of office leasing of class B office properties in the Atlanta area and what is driving that activity?

Wooten: There is a stronger demand for class B office than there has historically been in Atlanta. Class A leasing rates across metro Atlanta have risen 20% over the last three years and in some of the submarkets like Buckhead and Midtown that number is over 25%.

Some tenants who signed leases five years ago are dealing with the sticker shock by choosing to relocate to less expensive, class B properties. A lot of owners are renovating their class B properties to lure tenants from class A properties. We are finding some tenants would rather reinvest the capital in their businesses that they are saving by relocating to class B properties than renew their lease at class A properties.

GlobeSt.com: How will class A deliveries and future development impact class B leasing activity?

Wooten: Historically, new class A office development hurt the class B office leasing activity in Atlanta. This was because development sites in Atlanta were plentiful, construction costs were low and it was easier to get financing for speculative development.

When we were delivering empty buildings in the last real estate cycle, landlords were offering incredible concession packages to get tenants in these new buildings, while absorption numbers were at near all-time lows. Effective rental rates for a tenant at new buildings, after factoring in generous free rent and TI packages, was not much higher than if they stayed at their existing location.

This is no longer the case. With record high construction costs, rental rates have to be close to $45 per square foot and a lot of tenants are not willing to pay this. With more restrictive financing, any new building needs to be significantly pre-leased before it breaks ground. These factors will keep pushing activity to existing class A and class B office.