Audio: Atlanta Office Market Expansion Slowing to 'New Normal'

ATLANTA, GA—Atlanta’s office market ended the second quarter quietly, with increased vacancy, negative net absorption and rent growth driven by the additional space for lease, according to a Newmark Knight Frank research report.

While the 17.1% vacancy rate is far off the five-year high of 20.8%, the increase for three consecutive quarters could be a sign that the expansion mode has ended, or at least is taking a breather, says Marianne Skorupski, Newmark Knight Frank’s research director in Atlanta.

“The Atlanta office market has seen such a robust expansion over the past few years, and now that it’s cooled off a little bit, it’s still positive, but it seems that the good times are over, but that’s not really the case,” she says. “It’s just the pace of growth has slowed. So while we were seeing rent growth that was exponential—and hadn’t been seen in the market between 2015 and 2017—now, the growth we’re seeing is still high but it’s calmed down a little bit, and so it’s almost as if the markets are adjusting to a new normal.”

PODCAST INTERVIEW You can listen to an audio conversation with Marianne Skorupski of Newmark Knight Frank in the player below. If you do not see a player, you can click here to listen to the podcast.

Net absorption was negative 145,000 square feet in the second quarter, bringing the year-to-date total down to 225,000 square feet, NKF says. This was the third time in the past six quarters that net absorption was negative, another sign of the market’s slowdown.

AT&T vacated the first 200,000 square feet of the eventual 2.0 million square feet it will be leaving for its regional consolidation over the next year and a half. NCR moved out of 150,000 square feet as part of its relocation to Midtown, while Mercedes Benz moved out of the 100,000 square feet of temporary space it had leased prior to the completion of its new headquarters in Sandy Springs.

“I think one of the things that has worked in Atlanta’s favor this cycle is the lack of overbuilding,” Skorupski says. “Historically in Atlanta and other markets across the country, there’s been a rush to build, and you didn’t see that this this time around. So, the spec developments that are coming out of the ground now and in the second half of the year are very strategic, and they are being done in markets where the demand is still high or forecasted to be high.”

Several speculative office projects are expected to break ground over the next six months that will significantly affect Buckhead and Midtown. The Phipps Plaza mixed-use project is scheduled to begin in late summer 2018 with the demolition of the former Belk store at Phipps Plaza, NKR says.

The total redevelopment will add a Nobu Hotel and restaurant, a 90,000-square-foot Life Time Fitness and a 12-story, 373,000-square-foot class A office building by 2020. This will be the newest office development in Buckhead since Three Alliance Center was completed in 2017. The recent new construction by Phipps Plaza will impact Buckhead’s office market, as these newest towers are the closest sites for commuters to access GA-400 and are within walking distance of both Marta stations.

NKF noted that two deliveries added 282,000 square feet of new supply to the Atlanta office market this quarter, of which 93.4% was pre-leased. HD Supply’s Leadership Development Center in the Cumberland/Galleria submarket was the largest delivery at 222,000 square feet. Year–to-date office deliveries total 1.2 million square feet. Only 338,000 square feet is set to deliver in the second half of the year, but it is 100% pre-leased. The pending development pipeline has seven projects estimated to deliver in 2019 and 2020 totaling 2.5 million square feet, although only 175,000 square feet is pre-leased.