Earlier in August, the Atlanta Commercial Board featured a panel discussion on the State of Commercial Real Estate in Atlanta. The panelists included Bubba Chrismer, Managing Principal at Cresa Atlanta, as well as John Ferguson of CBRE, Lily Heimburger of SRS Real Estate Partners, Brett Hunsaker of Newmark Grubb Knight Frank, and Bob Mathews of Colliers, International.
All five panelists agreed that today’s market is decidedly a landlord’s market. The office and industrial sectors clearly belong to the landlord. The retail sector is still somewhat tenant-friendly—depending on location and building type—but not strongly so. For all building types, vacancy is down, and rents are up. Available space is being gobbled up quickly, so tenants need to be ready to make quick, informed decisions.
The Office Market
More than any other facility type, the office market is a landlord’s market, especially in Buckhead, Central Perimeter and Midtown. The same will hold true through 2016, because only 500,000 square feet of office space are currently under development. Other projects are still in the planning phase and have yet to break ground. With such limited space available, landlords are offering fewer concessions and less free rent.
When relocating or creating new space, companies are still choosing in-town locations over suburban ones—thus driving up rental rates even further. Large corporations are gobbling up big blocks of space quickly; Coca-Cola, Lincoln Financial, and Sage have all recently announced relocations into big blocks of space. Companies are also starting to look at building their own space, as happened with Mercedes-Benz and Comcast, for example.
The shrinking availability of office space is prompting some companies to get creative. Some are looking at flex space in places like Westside Atlanta. More co-working spaces are coming to market as cash-strapped start-ups seek out flexible, short-term leases as their initial office space.
Among the Atlanta submarkets, Buckhead is seeing the strongest demand for Class A space. Large spaces are hard to find there. Only one Class A building has 100,000 square feet available, and only three Class A buildings have 50,000 square feet of space. New developments—including Three Alliance and OliverMcMillian’s Buckhead Atlanta —are expected to enter the market at over $40-$45 per square foot. These anticipated asking rates are driving up rental rates in competing buildings.
Meanwhile, existing spaces are being renovated and upgraded to compete with “trophy” properties like 1776 Peachtree in South Buckhead and 715 Peachtree in Midtown. Older industrial and flex buildings are being redeveloped into loft-style office space and commanding relatively high rental rates. This trend is expected to continue as developers see value in these types of properties.
Midtown is experiencing a development boom as well. This development is moving from just along Peachtree to between Peachtree and Spring Street, and further south as Georgia Tech continues to draw corporate relocations to the area.
Central Perimeter and North Fulton are likewise seeing a lot of activity. The King and Queen buildings, for example, have attained rental rates of just under $35 per square foot and 90 percent occupancy.
Despite the resurgence of Atlanta’s market, however, most developers are waiting to secure tenants before breaking ground, as is the case with 525 North in Midtown.
The Industrial Market
Atlanta’s industrial market is likewise a landlord’s market, albeit slightly less so than the office market. The same should be true in six months. Vacancy rates are lower than they have been in years. Investors are starting to consider speculative development as Atlanta becomes a larger industrial hub, thanks to the city’s transportation network and Southeastern location.
The Retail Market
The retail market is somewhere in the middle between a landlord’s market and a tenant’s market, depending on the type of building and location in question. Redevelopment is the main trend in retail, as developers buy up aging retail centers across Atlanta and turn them into specialty centers with a distinctive ambiance and tenant mix.
As mixed-use development increases, new office buildings often include a retail element along with restaurant and residential space. These street-level retail spots are becoming premium real estate within the retail market.
Thanks to the success of Avalon, developers are looking for the next large, suburban retail project. The Doraville, South Atlanta, and Suntrust Park areas are all looking for successful retail developments.
Vacancy rates will continue to drop until developers decide to build more. With limited supply hitting the market and job growth and relocations steadily increasing, office space will continue to rise in value. Even if a developer decides to break ground tomorrow, the space will not be ready for move-in for another two years.
To exacerbate matters, materials costs are rising as well. The cost of concrete, for example, is 10 percent higher today than it was when Buckhead’s Three Alliance development broke ground. This trend will only drive up rental rates further as development becomes more costly.
The good news is that, even with rental rates at historic highs, Atlanta is still much less expensive than major cities like New York and San Francisco. The cost of living here is less, too. These advantages make Atlanta an appealing location for companies of all sizes.
Navigating the Waters
Atlanta’s once-sluggish commercial real estate market has turned around rapidly. As landlords raise rent and pull back on concessions and TI allowances, tenants need help weighing these costs and understanding what current trends mean to their bottom line.
Cresa Atlanta is committed to helping tenants navigate the Atlanta market. We negotiate an average of 300 deals per year, so we are well-versed in today’s trends. We exclusively represent tenants, not landlords, so your best interest is always top of mind. We can negotiate contracts, find off-market space, and work with landlords on your behalf, assuring that you get the most for your money while securing the optimal space for your company.
Blog contributed by Bubba Chrismer, Managing Principal of Cresa Atlanta. Bubba has represented tenants in the Metro-Atlanta area for more than 30 years and has vast expertise in negotiating leases with all types of building owners. For more information, contact Bubba at 404-446-1574 or bchrismer@cresa.com.