It is no secret that Atlanta has been a booming market in the post-recession era. Metro Atlanta added more than 85,000 jobs in 2016, while the unemployment rate has dropped to 4.9 percent, back to a prerecession level (2007). Atlanta has ranked near the top of the largest 10 office markets in annual job growth, outpacing the likes of New York, Los Angles and Chicago. There was 3.3 percent job growth in 2016, outpaced by only one large metropolitan peer, Dallas-Fort Worth.
The Atlanta office market has shared this success as rents have continued to climb to record levels and vacancy levels have dropped. Since the end of 2012, overall gross asking rents have risen 22.1 percent, or $4.41 per square foot. Thanks to major relocations by companies such as Honeywell, GE Digital and Synovus, and major expansions by Kaiser Permanente, Sage, Anthem and Kabbage, among others, Atlanta’s overall office vacancy rate has plummeted 540 basis points from the end of 2012 (from 22.3 percent to 16.9 percent in the first quarter of 2017).
With market fundamentals in a stronger state than at any other time in recent history, the introduction of new product presents a litmus test of sorts for the region. Currently, there is almost 2.9 million square feet of speculative office space under construction (excluding built-to-suit projects such as NCR, Comcast or HD Supply). This is the most construction activity since 2008 to 2009 when there was almost 5 million square feet of office product coming to the market. The recession-era construction boom saturated the Buckhead and Midtown submarkets with both Terminus buildings, Phipps Tower, 3344 Peachtree, 12th and Midtown, and both 201 and 271 17th Street in Atlantic Station coming on line, among others. By the end of 2010, the vacancy level within Atlanta’s Buckhead, Midtown and Downtown submarkets surged to 28.5 percent, and it didn’t fall below 20 percent until the midway point of 2015.
Much of the inventory under construction (over 1.3 million square feet) will be delivered to the market during the second quarter of 2017. This includes Three Alliance Center, Riverwood 200, 3400 Overton, 8000 Avalon and Stockyards, among others. Due to high construction costs, asking rents for these buildings represent some of the highest in the market, ranging from the high $30s to mid-$40s per square foot (gross).
Based on this upcoming test, should landlords and investors panic? In short, not at all. The big reason is preleasing. From 2008 to 2010, many of those buildings were delivered with minimal preleasing in place. Today, most of the buildings that will soon be delivered have a significant amount of commitments in place. Three Alliance Center, Riverwood 200, Stockyards, 3400 Overton and 8000 Avalon are all 50 to 60 percent preleased to major tenants such as Global Payments, Synovus, Delta Community Credit Union and Microsoft.
Investment and Lending
According to C.J. Kelly, vice president of CBRE’s Debt & Structured Finance Group in Atlanta, we are seeing stricter lending on new construction.
“Banks, which have historically been the primary source of construction debt, have pulled back significantly in their appetite for construction lending for a variety of reasons,” says Kelly. “Chief among these factors has been the effect of recently enacted regulations related to the passage of the Dodd-Frank Act, and more specifically to its creation of the HVCRE (High Volatility Commercial Real Estate) bucket, which dramatically increases the capital reserves required against any debt deemed as not fully stabilized.”
With the all-too-recent memories of significant losses on construction loans with little to no preleasing requirements, banks have become highly selective in the construction projects they are willing to finance, focusing their limited capital for HVCRE on only the best projects with the best sponsors. “In addition to more significant preleasing requirements, those banks that continue to make construction loans are requiring more sponsor equity in front of their first dollar; if Orange is the New Black, then 50 percent of cost is the new 60 percent,” adds Kelly.
The Atlanta office market has been thriving since emerging from the Great Recession and is in an enviable position relative to other large markets. In fact, CBRE Econometric Advisors ranked Atlanta’s office market as the most recession-resistant markets in the nation due in large part to strong performance metrics and moderate rent growth characteristics. Chief among Atlanta’s selling points are its abundance of talent, business-friendly environment, diversified tenant base and low cost of living and doing business.
Despite being in the midst of an extended expansion period, there have been no signs of slowing. Though there is a big test looming with large new deliveries hitting the market, it appears, unlike in 2008, that the level of preleasing activity positions Atlanta as a market where both owners and tenants will reap the rewards of new inventory additions.