NKF Research: Atlanta Fundamentals Flat for Third Quarter

10/19/17

According to recent research released by Newmark Knight Frank, Atlanta’s office market fundamentals were flat in the third quarter of2017, as the market recovered from the significant growth that had occurred between 2014 and 2016. That period’s pent-up demand had ledto a rapid expansion, as companies had opened new offices in theregion, causing vacancy to drop and rental rates to increase. However,both of these metrics have shown a slowdown in the rate of improvement this year. Market activity is perceived by many to be at a “new normal,”as rents are expected to remain elevated, while the majority of tenant demand should come from pending lease expiration needs rather than growth that is new to the market.

Vacancy at the end of the third quarter measured 17.2%, on par with last quarter but above the 16.6% from one year ago. Much of the increase in vacancy is attributed to the 2.3 million square foot of new deliveries over the past year. It is expected to decline as tenants move into the new buildings. Most of the tenants that pre-leased space in the new projects are expanding or opening a new Atlanta location, which is good news for the market.

Much of the increase in vacancy is attributed to the 2.3 million square foot of new deliveries over the past year

Net absorption totaled 79,304 square feet in the third quarter, bringing the year-to-date total to 245,322 square feet. This was below the 553,000 square feet absorbed at the same point one year ago and the 2.3 million square feet absorbed in the first three quarters of 2015. The outlook for the last quarter of the year is positive, yet 2017’s absorption will likely be well below the absorption recorded every year since 2012.

Metro Atlanta’s average asking rental rate across all classes was $25.07/SF, the highest level seen since NKF started tracking statistics.Although this represented only a 0.5% increase over the quarter, it was a 6.8% increase from the $23.48/SF average of one year ago. The third quarter average represents growth of 24.0% from the record low recorded since the 2008 recession of $20.22/SF. Class A asking rents followed similar patterns, as the third quarter’s average of $28.21/SF was up 0.6% increase over the quarter and 5.2% over the year.

New Deals Account for Half of Top Transactions

Just under half of the leases signed for more than 10,000 square feet during the quarter were new transactions. These include relocations as well as companies opening new offices in the region. Tenants that renewed in place, either changing the amount of space or remaining the same, accounted for 40.8% of these same deals. Only one transaction during the quarter was for more than 100,000 square feet, a decline from the first two quarters of the year.

Geographically, these larger leases were spread throughout the region fairly evenly, with 22.8% signed in North Fulton/Forsyth. North Fulton’s leasing activity mirrored the overall market as 46.2% of the transactions were new/relocations.

New Development Levels High, But Pre-Leased

Only one building was completed during the third quarter of 2017, as many were pushed back for delivery into the fall. In Cumberland/Galleria,3400 Overton was the third new building to be completed this year,totaling 172,000 square feet and 64.2% pre-leased to Synovus. The bank will be using this location to consolidate most of its Metro Atlanta locations. Over 870,000 square feet is forecasted to be completed next quarter, for an annual total of 2.4 million square feet. This would be the most space built in 15 years.

Over 3.7 million square feet is under way in the construction pipeline for delivery over the next 30 months, and 67.7% of that space is pre-leased.Four buildings will serve as new corporate or regional headquarters. Only three properties, comprising 805,000 square feet, are being developed on a speculative basis, which will help ease the impact on market fundamentals by causing a spike in the vacancy rate. Almost 78.0% of the total construction activity is in Midtown and Central Perimeter.

Market Outlook

Forecasts for Atlanta's economy remain positive yet much lower than the growth of the past several years. This will have an impact on the officemarket, as the rapid expansion between 2014 and 2016 gives way to a more controlled pattern. The expansions in the construction pipeline due to new headquarters moving to the area will lead the way for the market to grow, despite the lower job growth projections.

To view the entire report, go to http://www.ngkf.com/Uploads/FileManager/3Q17-Atlanta-Office-Market.pdf.

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With the expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents.

Newmark Knight Frank Research Reports are also available at www.ngkf.com/research.

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