4Q 2009
Office Market Finishes The Year Deeper in The Red
ABSORPTION AND VACANCY
The office market continued its decline in the fourth quarter of 2009 with an additional 535,384 square feet of Negative Net Absorption (NNA) for a Year-end 2009 total of 2,892,984 sf. The vacancy rate increased to 16.8% according to CoStar Group but many experts believe the real vacancy is closer to 20% while average quoted rental rates continued to decline to $19.14/sf.
However, the mix of vacancies changed dramatically in the 4th quarter with 422,147 square feet of the NNA in Class A space. Prior to Q4 virtually all of the NNA in 2009 resulted from Class B & C vacancies. The submarket impacted the most was the Central Perimeter market with 404,888 sf of NNA and a year-end total of 974,834 square feet representing 34% of all NNA for 2009. Downtown, which was very strong in 2007 and 2008, experienced net vacancies of 648,781 square feet and net vacancies in North Fulton totaled 528,982 sf for 2009. Midtown held its own with a positive net absorption of 72,946 sf.
The story for 2010 will continue to be Buckhead and Midtown where over 1.8 million square feet will be delivered to the market this year. While new deliveries aren’t reflected in net absorption figures they will significantly impact the vacancy rates in those submarkets.
RECOVERY?
Economist Roger Tutterow of Mercer University was recently quoted in the AJC saying, “The recession is over but…we need to understand that it will be way into 2013 and possibly 2014 before employment gets back to where it was on a national level before 2008 and 2009.
In order for the office market to recover several things need to happen. First and foremost, white-collar hiring needs to return. Most economists are not projecting significant increases in white-collar hiring for 2010 and 2011 which, if correct, will result in continued increases in vacancy and aggressive deals from those landlords feeling the most pain. Second, new construction needs to be minimized. This is not a problem after the existing construction is delivered since financing is not available to developers to build new buildings. The third factor in an office market recovery, would be major companies relocating to Atlanta like NCR and First Data. Most leasing activity in Atlanta is represented by existing companies moving from one local location to another, and usually in the same submarket though we have seen more crossover activity in the past six months than in years past.
However, another large corporate relocation could accelerate the recovery. NCR significantly impacted the Gwinnett Mall office market occupying nearly 400,000 square feet of Class A office space in a market that has been suffering for several years. We have completed numerous leases in the Sugarloaf market just north of the Mall over the past two years but none of our clients would consider the Mall area even though the prices were several dollars per square foot less. This will be a big help to other buildings in the area.
SHADOW SPACE
Adding to the problem is a large amount of Shadow Space in the market. Look around your office, Are there any open offices or cubes not being utilized but not available on the market for lease or sublease? Shadow Space or Phantom Space is space under lease that is unused but not available in the market.. There is no way to accurately measure the amount of Shadow Space in the market but estimates are as high as 10 - 15% which, if added to current vacancy rates, would mean that 27 - 30% of office space is either vacant or not being used today. As leases expire, much of the Shadow Space will be returned to landlords and placed on the market unless landlords are aggressive enough to coerce tenants to retain the space or white-collar hiring picks up to fill the space.
For specific information on your submarket,
please call Bill Leonard or Doug Legg at (404) 252-9700