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Atlanta Office Market
REALITY BITES:
• Vacancy rates have hit 19.1% across metro area; Class A surpasses 20%. 2009 will be the year best remembered as when the full brunt of the Great Recession took its toll on commercial real estate. The year ended deeply in the red, with landlords across metro Atlanta seeing a negative net absorption of more than 2 million square feet on its 199.5 million square feet of office space. Adding to the pain, gross absorption – the total amount of square footage leased by companies and a litmus test on corporate appetite for expansion – decelerated throughout the year to the lowest quarterly amount since the 2001 to 2002 recession, from nearly 4.5 million square feet per quarter in 2007 to 3 million square feet per quarter last year. Of course, all of this was in tandem with mounting job losses – particularly among professional service and managerial jobs that historically used office space. Metro Atlanta’s unemployment rate broke the 10% barrier last year, with a good portion of those job losses among positions heavily using office space. As of November 2009, the financial sector lost 14,600 jobs – a 6.7% decline over the previous year – and nearly 30,000 jobs were shed in professional and business service companies, including 21,400 jobs among technical, scientific and professional services. Assuming an industry average of 175 square feet per employee, companies reduced space usage by at least 7.7 million square feet – a portion of which has yet to be reflected in vacancy numbers. In short, Ackerman & Co. sees the market continuing a downward trend in the coming quarters, albeit at much less velocity, as Atlanta treads along a bottom of an anemic recovery.
Atlanta’s office market experienced four consecutive quarters of negative net absorption, the first time since the 2002 recession. And four of the 10 Atlanta office submarkets reported more than 20% vacancy rate, including Buckhead and Central Perimeter, and six of the 10 Class A submarkets tallied vacancies higher than 20%. As a whole, Class A space fared better last year, losing 565,000 square feet in absorption versus 1.4 million square feet in negative net absorption in Class B properties. This continues to demonstrate a trend of trading up: tenants taking advantage of historic low pricing to improve space quality. Of course, the performance gap between Class A and B properties isn’t entirely explained in this way. The sheer number of layoffs and corporate downsizing has impacted landlords across the metro area. This has become especially evident in sublease availability. From the beginning of 2008 until the end of 2009, sublease space -- colloquially called “shadow space” in real estate circles – rose nearly 1 million square feet, from 2.65 million square feet to 3.53 million square feet. To put another way, it’s as if Bank of America Plaza, SunTrust Plaza and the King & Spalding building all went dark overnight. This shadow space will eventually add to the overall vacancy rate, and will add to the downward pressure on rents. Rents Nearing Bottom The bottom on rents has some wiggle room down – but not as much as statistics may dictate. Current average quoted rates on office buildings is $19.77, down from $20.58 at the beginning of 2009. These rates are at a time when vacancies have neared 20%. Four years ago, when vacancy rates were 16%, rates were $18.84 per square foot. The Class A discrepancy is even more glaring. Today’s average asking rate is nearly $22 a square foot with an overall vacancy rate of 20.7%. At the beginning of 2007, rates were $21.80 with a vacancy rate of 16.5%. But quoted rates only take into account a part of reality. Given the increases in tenant improvement allowances, incentives (now averaging a free month for every year of a lease) and somewhat higher than average commissions for larger deals, effective rates are much lower than quoted rates. Given those factors, Ackerman sees rates nearing a bottom for well-placed assets in the larger office submarkets. Renewals Rule the Day Renewals dominated the lease landscape this past year as tenants took advantage of what some consider once-in-a-generation pricing. Some of the largest office leases this year were companies restructuring existing leases with existing landlords – and by many accounts – at very favorable terms.
These renewals, in many instances, are robbing Peter to pay Paul – borrowing deals that would have naturally occurred this or next year. Instead, these deals will be extended out five years to a full decade ahead. This is not an uncommon practice during real estate recessions – and was prevalent in the early 2000’s recession – as companies tighten real estate expenses through better terms. Companies leased a total of nearly 10 million square feet of office space throughout Atlanta – a gross volume off by other years. In 2008, companies leased 13 million square feet and companies leased more than 14 million square feet of office space the year before. News that NCR, Sony Ericsson and First Data all planned to move their headquarters to Atlanta has somewhat repaired the area’s bruised economic development ego this past year. Deals such as these were few for the metro area this past decade as Atlanta struggled against up-and-coming regions like Coastal Texas, Charlotte and even the northeast region. While these don’t make a big dent in office occupancy, Ackerman sees these deals as much needed momentum and a signal to other companies that the region is still a top destination for the corporate world. • NRC international HQ Gwinnett 1,250 jobs
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