Atlanta's 3Q Office Market

The Atlanta Office market ended the third quarter 2010 with a vacancy rate of 21.5%. The vacancy rate was up over the previous quarter, with net negative absorption over 200,000 SF.

Though economists have indicated that the recession is over, the Atlanta market is expected to lag behind the rest of the U.S. in recovery. At 10.3%, unemployment in Georgia is higher than the national unemployment rate of 9.6%. Unemployment is expected to exceed 9% through the next two years.

The average quoted asking rental rate for available office space, all classes, was $18.88 per square foot per year at the end of the third quarter 2010 in the Atlanta market area. This represented a 2.6% decrease in quoted rental rates from the end of the second quarter 2010.

Evolution of Office Space

Historically, occupancy costs have always had a big effect on a company’s bottom line. Depending on how a company is structured, they are usually the second or third highest cost of operating a company, along with the workforce/personnel and IT. With the changes in the economy from the rapid growth in technology, to the recession, how has the environment of the workspace changed over the last few years? As businesses cut budgets, it has become more prevalent in almost every sector of the economy, that companies have made real estate decisions to help to reduce their expenditures. As someone who represents Tenants with their office leases, it has always been a part of my job to reduce my client’s occupancy costs. However, the role of advising clients with their office space has even more so today, developed into a consulting business. We are seeing before us, a changing corporate culture and a new generation of business owners and employees that have entered the market. Following are a few aspects of the workplace that affects the modern office of today -

A new generation: The traditional office has changed in ways that have scaled back the average square feet per employee. Not only are we seeing executives move from being in a large office, but they are moving into smaller offices and in some cases into a workstation with the rest of the employees. The company culture of collaboration has emerged as more conference rooms have become more relevant in the workplace. Co working has become more popular as have the concept of hoteling with telecommuting.

Technology: Technology has grown at an extremely rapid pace and has had an impact on the amount of space that is needed. The capability to eliminate record rooms or large server rooms has lead to digital record keeping and a data centers. Cloud computing has created an ease of access through remote sites by the internet, usually in the form of web based applications with customization by the end user.

Sustainability: Sustainability has come to the forefront of commercial real estate and is here to stay. In addition to being a good steward to the environment, the advantages of office buildings going green have financial gains over the long term for both Tenant and Landlord. Over time, this will help reduce the operating costs of the building, which is directly passed down to the tenant.

At the Bottom for Atlanta Office Space?

The Office Market in Atlanta has been down nearing three years now and is there any end in sight? We are at a high with office vacancies since 2004 and buildings just delivered to the market. In my opinion, we'll be at the bottom until jobs start to come back. When we have a few consecutive quarters of job growth, that will be the time that we'll start seeing positive absorbtion.

A good article written by Jim Jordan with Sutherland, Asbill & Brennan LLP, in the Atlanta Business Chronicles addresses the situation and provides some good insight on "When will Atlanta's Office Market Hit Bottom?"

Atlanta Office Space (Buckhead, Midtown, Downtown) has 12.3 million sqare feet of vancany

Gertha Coffee with the AJC has a great peice outlining the massive blocks of space throughout Atlanta (Buckhead, Midtown, Downtown). AJC : Building Boom made Lots of Room

Lots of deals to be had if you are a Tenant in Atlanta. However, don't let the articles of higher vacancy and reduced rental rates mislead you. The true deals that seem to be heard on the streets are good credit tenants, they have a long term strategic focus with their company and can make long term decisions with their real estate, and it's the larger tenants that are able to take the most advantage of the market conditions.

Atlanta Office Space - Tenant's Market

Atlanta Overview
Atlanta vacancy rate rose to 16.7% across Metro Atlanta and exceeding 20% in some submarkets. The increase in vacancy has driven a decline in rental rates, thus giving tenants greater opportunity and more options to reduce their occupancy costs. Not only are landlords competing with new deliveries in some submarkets, but the additional space for sublease on the market has increased to over 3.5 million square feet, providing for aggressive deals.

The Atlanta market is only just beginning to enter a period of a few years with many maturing loans on commercial properties, in which we will see much more delinquency, leading to increasing cautiousness when negotiating lease terms.

Tenant's Market
The recession is affecting all markets and all industries. As we have continued to see unemployment numbers rise, vacancy rates have increased and rents have decreased. Landlords are willing to work with shorter lease terms to get them through the next couple years, anticipating a turn around in 2011 or 2012.

Tenants with good credit have found flexibility and many options available in the market. Though short term leases are more prevalent, a tenant can really take advantage of a soft market with securing a long term lease of seven years or more. This can be seen with tenants who are able to foresee a clear view of the long term strategy of the company, and in coordination, align their real estate needs with their strategic plan.

We see opportunity to significantly save on overall occupancy costs. There are many possibilities to upgrade the space, increase the square footage, and even move up from a class B building to a class A building. It is important to exercise caution with reevaluating your current lease, as some landlords are financially unstable.

It is necessary to engage a tenant representative for advisory services, to benchmark the tenant’s current building and market situation in order to capitalize and take advantage of the market.