Transwestern: Atlanta’s Office Expansion Is Strongest in Urban Areas

ATLANTA, GA—After four years in which annual absorption ranged from 2.0 million to 3.7 million square feet annually, Atlanta absorbed approximately 600,000 square feet in 2016 and just under 450,000 square feet in 2017. In the first nine months of 2018 Atlanta has seen essentially flat absorption, with -5,467 square feet reported as of the end of Q3. The market saw nearly 500,000 square feet of net absorption in Q1, but that has been offset by move-outs and space reductions since then. Q3 saw mildly negative demand of -104,329 square feet, with gains in urban submarkets offset by losses in the suburbs.

According to Transwestern’s Keith Pierce, director of research for the firm’s Southeast region, overall vacancy rose slightly to 16.7% due to the negative absorption and the delivery of unleased space in 4004 Perimeter Summit and a few smaller properties this year. But Pierce believes an important story has been missed: vacancy has been plummeting in urban class B properties, with Midtown class B space at just 4.3% vacant, and Buckhead close behind at 7.3%. Users are looking for affordable space in the most desirable neighborhoods, he says.

Atlanta’s economy continues to outperform the nation, and its unemployment rate is at its lowest point in more than a decade. The metro area continues to attract relocations from workers and businesses, and Atlanta is one of the nation’s fastest-growing MSAs as a result. This is reflected in Atlanta’s office market, which continued to enjoy stable vacancy levels and rising rental rates, even as speculative construction increased in Q3 2018. Demand has been off-pace for the past few months but is expected to see a rebound in Q4.

Year-to-date, class A space enjoyed about 85,000 square feet of net new demand, while class B space saw 90,000 square feet of negative absorption during the first nine months of the year. Net absorption in Q3 was minimally negative in both sectors, but Downtown, Northwest, and Northlake all saw healthy levels of demand in the quarter. Year-to-date demand has been strongest in the three urban submarkets of Downtown, Midtown, and Buckhead, as well as the much smaller Northlake submarket.

At the end of Q3, nearly 2.8 million square feet of speculative office space was under construction. One 60,000-square feet project was finished during the quarter.

There are already 1.3 million square feet of build-to-suit projects under construction for NCR, State Farm, and Anthem. New spec developments are underway in nearly every submarket and represent a wide variety of building sizes, types, and uses, Transwestern says.

About half of the space under construction is in Midtown, where projects include Coda, 725 Ponce, and T3 West Midtown; all of these are in very desirable locations with abundant nearby amenities. Approximately 43% of the spec space under construction has already been pre-leased, and more is likely to be leased prior to delivery.

Overall asking rents rose to an average of $26.38 per square foot in Q3 2018, with class A rents rising 5% since 2017 to an average of $30.20 per square foot. Class B rents rose during the same period to an average of $19.85 per square foot. Average asking rates rose in every submarket in the Atlanta market during Q3, with class A asking rents at their highest in Midtown ($37.32) and Buckhead ($35.56). Class B rents in those two submarkets average about $10.00 per square foot below their class A averages.