4Q 2011

CLASS WARFARE 

Class warfare has become a frequently used term during this political season but it also applies to the Atlanta office market. In recent years we have seen a flight to quality as companies take advantage of the heavy concessionary market to upgrade their offices from Class B space to Class A space. 

Net absorption in Class A space for 2011 totaled 1,429,693 rentable square feet (RSF) of which 736,206 RSF was in Buckhead. In contrast, net absorption in Class B space was (704,082) RSF for the year including (498,422) RSF Downtown, (270,780) RSF in Midtown and (175,150) RSF in Central Perimeter.

VACANCY
CoStar reported overall vacancy rates in the Atlanta office market declined from 17.5% in Q4 to 16.7% however these numbers are misleading as a significant factor in the decline was the removal of 2,000,000 RSF from inventory as the former City Hall East, now known as Ponce City Market, was removed as its total renovation has begun. Without this reduction, vacancy would be 17.3% representing only a slight decrease. 


ABSORPTION
Net absorption for the overall Atlanta office market was positive 619,887 RSF in the 4th Quarter for a total of 737,095 RSF for the year ending 2011. The good news is that the trend is positive digging out of a hole of negative net absorption of (298,928) RSF for the first half of the year. 

RENTS
Rental rates continue to be attractive compared to rates four years ago before the financial meltdown. Average rental rates for the metro Atlanta area were $18.67 per RSF at year-end 2011, down from $20.27 per RSF at the end of 2007. Though rates have stabilized and may begin to see a slight upward climb it will take a few more quarters of positive absorption to establish a new trend.

SUBLEASES
Sublease space continues to decline reducing an additional 186,780 RSF in Q4 and a total of 288,135 RSF for the year ending 2011 at 2,036,256 RSF. Virtually all of the reduction was in Class A space which absorbed over 248,000 RSF through subleases and space returned to landlords and added to their inventory. Interestingly, over 90% of the available sublease space on the market is comprised of blocks of 20,000 RSF or more contiguous space. While some spaces can be divided it has become more and more difficult to find the 3,000-10,000 RSF plug n play sublease space we have been used to in year’s past.

THE FUTURE
Even though Atlanta has experienced one of the slowest recoveries in the nation, landlords are reporting more expansions in the last half of 2011 than in the previous 12-18 months combined. Hopefully companies are no longer able to operate efficiently without adding new people and the availability of qualified talent at a reasonable cost is allowing the pent-up demand to finally open up in spite of the continuing economic and political uncertainty. Because of this change in momentum landlords are beginning to push rates upward and reduce concession packages though there are still exceptions in the market and good deals to be found. We just completed a major transaction in December with the best terms we have seen in a while.

The key question is whether the momentum is sustainable. The next few quarters are critical to see if this can be maintained. If momentum continues, then landlords will push even harder. They have been waiting almost four years for any sign of recovery and will jump at the opportunity to improve their rent roles so it is wise to act sooner than later.

One of the biggest deterrents to the recovery of the office market is the hangover from CMBS financing of over-priced acquisitions before the market collapsed. The recent foreclosure of the Bank of America tower in Midtown is a high-profile example of what is taking place in many office properties in Atlanta. Other well-known buildings such as The Terraces, Colony Square and Midtown Plaza are locked in negotiations trying to restructure their debt and, in the meantime, are unable to fund tenant improvement costs in order to make new leases. This will continue until the issue is resolved either through negotiations or a change in ownership.


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For specific information on your submarket, 
please call Bill Leonard or Doug Legg at (404) 252-9700