Declining vacancy rates and higher rents for office space in Atlanta means fewer options for tenants and more opportunities for investors, according to a new report from JLL.
With few new office projects coming online in the near future, tenants are left to choose between renewing existing Class A leases at higher rates or considering Class B options, the report revealed. Concurrently, landlords at Class B office space have taken notice, as year-over-year rates increased in seven of Atlanta’s nine submarkets.
The average direct asking rate for Class A office space in metro Atlanta was $23.77 in the first quarter, eclipsing the $23.45 direct asking rate at the end of 2008. The trend of higher rents and fewer concessions for tenants is expected for the remainder of 2015.
“In recent months, Atlanta has experienced an economic resurgence that has manifested itself in a series of corporate relocations and expansions,” said Mike Sivewright, JLL’s market director for the Atlanta region. “With the ongoing expansion of the city’s office sector, space, especially that in Atlanta’s intown markets, is at a premium.”
NCR, WorldPay, RIB Software and athenahealth are among the tech companies that in recent months have announced moves to urban locations, in part to tap into a growing base of millennial talent that for now prefers to live intown. However, NCR’s approach differs slightly from other tech companies in that it is maintaining a significant presence in the northern suburbs, which could prove beneficial should millennials ever migrate en masse to the suburbs.
“The current Atlanta office market dynamics present what is likely one of the best value growth models that we have seen in 30 years,” said David Tennery, lead for JLL Southeast Capital Markets. “The growing spread between Class A and B lease rates paired with Class B vacancy present significant value growth plays for well-located B properties. And, the spread between current Class A lease rates and the lease rates required to justify meaningful speculative development continue to provide a very strong outlook for additional upward movement in Class A metro wide.”
Other key findings from the report:
- Overall, the direct asking rate for Class A and Class B office space combined averaged $21.03 per square foot, and the total vacancy rate of 18.8 percent in the first quarter was the lowest since the end of 2008, when the rate was 18.5 percent.
- An anticipated increase in mergers and acquisitions will likely influence office dynamics in the near-term, particularly in the healthcare sector, which occupies 5.5 percent of Atlanta’s office inventory.
- As healthcare companies look to cut costs to meet shareholder expectations, Atlanta is likely to draw more demand from companies.
- Buckhead remains the most expensive part of the city, with an average direct asking rent of $28.76 per square foot for Class A space in the first quarter, well above the $23.77 per square foot average for Atlanta as a whole. Buckhead Class A Trophy building lease rates have now topped $40 per square foot.
- Of the more than 1 million square feet of Class A office space currently under construction, 17.9 percent has been preleased.
- With an average direct asking rent of $13.16 per square foot in the first quarter, West Atlanta is home to the most affordable office space in Atlanta, all of it Class B space.