3Q 2009
Atlanta Office Market Continues to Decline
The office market continued its decline in the third quarter of 2009 with an additional 647,138 square feet of NEGATIVE NET ABSORPTION (NNA) for a YTD total of 2,299,482 sf. Vacancies increased from 16% to 16.7% in Q3 (in line with the national average of 16.5%) while average quoted rental rates declined from $19.51/sf to $19.21/sf.
However, we have to dig a little deeper into the numbers to find the real story. Amazingly, virtually all of the NNA occurred in Class B & C space while there has been only 38,168 sf of NNA in Class A space YTD 2009 in Metro Atlanta. Companies are taking advantage of this market to upgrade to Class A space and lock in lower rates in better properties. Some tenants are considering Buckhead as an option for the first time with reduced rental rates and concessions being offered. Also, we expect much of the NNA is the result of downsizing as leases expire and defaults by tenants.
WHERE ARE THE DEALS?
Buckhead still leads the way with the impact of four new office towers, two of which have already delivered and two more to be completed shortly. Rates have declined quickly and concessions are strong. Central Perimeter must follow suit soon with over 1 million square feet of NNA in the past twelve months in spite of First Data’s 185,000 sq ft lease. Landlords are just starting to see the writing on the wall. Midtown, though strong YTD, is facing major vacancies with nearly 700,000 sf available now or by mid-2010 at Promenade II; Campanile’s 373,000 sf of vacancy; Atlantic Station, once thought to be invincible, with over 550,000 sf available, and, finally, the delivery of 12th & Midtown in January 2010 with over 600,000 sf unleased. These large blocks of space are the equivalent of the far more publicized new buildings in Buckhead and should have the same impact on Midtown over the next year. North Fulton has different challenges. There is no new construction but it has experienced the largest NNA YTD with over 530,000 sf (500,000 sf of which was in Class B & C space).
WHO’S YOUR DADDY?
It has never been more critical to vet your landlord or sublandlord before signing a lease. We expected to see buildings forced into receivership, foreclosed and unable to fund necessary tenant improvements to attract new tenants and retain existing tenants. We are there and stories are spreading in the community about buildings facing issues over restructuring their debt. Some will weather the storm and some won’t, depending on their lender. If the building was purchased in the past 5 years there is a good chance the owner will be facing challenges in restructuring their debt with declining rents and occupancies. Daily operations probably won’t be impacted seriously in Class A properties but may be more of a challenge in Class B buildings.
BOTTOMED OUT?
Has the office market bottomed out as some are reporting? Not a chance. With over 34 million sq ft of office leases expiring in 2010 (representing 12.9% of the market) more space will be returned to landlords and tenant defaults will continue unless we see a turnaround from small businesses, which have been excluded from the “recovery”. Without job growth there can’t be a recovery in the office market. We expect to see good opportunities for tenants for another 18 to 24 months before signs of a true recovery occur in the office market.
TIME TO BUY?
If you are interested in owning your own office building the next 18-24 months will be the time to buy. Just realize you may have a long-term hold and your appreciation will all be “opportunistic” from buying at the bottom of the market. There has been very little, if any, real appreciation in market value of office buildings under 50,000 sf over the past 15-20 years. If you plan to lease out a portion of the building, keep in mind there are no Class A office buildings under 100,000 sf and the NNA has all been in Class B & C space.
For specific information on your submarket,
please call Bill Leonard or Doug Legg at (404) 252-9700