It looks like a good year ahead for commercial real estate in metro Atlanta.
Despite millions of square feet in new office space coming on line in the next few years, commercial real estate market fundamentals will continue to improve in 2007, observers say.
Rents will rise and absorption will increase as the office market comes closer to justifying the record prices paid in 2006 for several Atlanta trophy towers.
A big question mark, however, is what impact the millions of square feet of speculative office projects announced during the past year will have — assuming they get built.
During the last 12 months, investors shattered the per-square-foot price record held by the Pinnacle in Buckhead since 2004.
In the fall, Bank of America Plaza sold for $348 per square foot. Then 1180 Peachtree set the bar even higher, selling for $407 per square foot.
In the coming year, said Kurt Hartman, vice president of Hines, which developed 1180 Peachtree, “I think the fundamentals of the market will catch up with the capital side.”
Those fundamentals have been on an upward trend.
In the past year, the metro area vacancy rate fell below 20 percent for the first time in four years, according to Dorey Market Analysis Group, a commercial real estate information company.
Ken Ashley, a director at Cushman & Wakefield Inc., said occupancy levels will continue to increase in 2007.
Also, rental rates rose to their highest average level in more than three years, reaching $20.19 per rentable square foot at the end of the third quarter.
Duncan Gibbs, senior vice president at The Staubach Co., expects those rates to rise “significantly” in 2007 and coming years.
One big reason is that, thanks to an ever-widening gap between rents for new construction versus existing space, landlords will have more leverage to raise rents, he said.
For example, thanks in part to skyrocketing construction costs, tenants that move into new trophy buildings in Midtown and Buckhead can expect to pay $32-$34 per square foot.
That compares to $24-$25 at many existing buildings now.
Gibbs noted the investor market places a premium on vacant space (with the hope that new owners can raise rents), and as a result, in the hot investment climate, many existing landlords are less likely to renegotiate leases.
The big X factor in the improving office market is the impact of new projects. About 1.4 million square feet of new product had been completed through the third quarter, according to Dorey, most of it class A buildings.
Another 2.4 million square feet is under construction — including Terminus 100, 3344 Peachtree Road, 55 Allen Plaza and Atlantic Station’s 201 17th Street, which all have announced tenants.
But developers also have announced plans for millions more square feet in new office projects that do not have announced tenants.
Such projects include Daniel Corp.and Selig Enterprises Inc.’s “12th & Midtown,” which calls for 725,000 square feet of class A office tower; and MetLife Inc.’s Midtown project that features more than 650,000 square feet of office space.
Dewberry Capital Corp.’s nearly 300,000-square-foot building is just about finished and does not have any announced tenants.
Historically, noted Cushman & Wakefield’s Ashley, most of the good credit tenants in Midtown have either come from within the market or from downtown.
However, Staubach’s Gibbs said he’s aware of large Buckhead tenants who are scouting in Midtown because of the “excitement” being generated in the submarket.
“You’ve got some large tenants out there, and all it takes is one tenant.”
Credit card marketing firm CompuCredit Corp.’s (Nasdaq: CCRT) 411,000-square-foot lease at Concourse Corporate Center this past year underscores just how large tenants can be. SunTrust Bank, said to be scouting for 500,000 square feet downtown, is another example.
And at least one major spec project, 3344 Peachtree Road, appears to be justifying all the development optimism.
In April, Regent Partners LLC broke ground on the 50-story, vertical mixed-use tower as a 100 percent speculative project. (When complete in spring 2008, developers say the building will be the tallest structure built in Atlanta in nearly 15 years.)
The tower is 32 percent pre-leased today — with more leasing announcements expected soon. Signed tenants include real estate firm Jones Lang LaSalle Inc., First Horizon Bank and the Buckhead Club.
Based on reaction to 3344, Regent Partners already is moving forward with plans for a second phase of the project, which also will feature a mixed-use building.
Atlanta Business Chronicle – December 29, 2006
by Jill Lerner, Staff writer
I expect this wave of strength to reach Cherokee County office markets as well in 2007. The numbers will never match those of Atlanta, but the demand for smaller and less expensive office space could. Look for more office to built in Cherokee in 2007 and for more tenants to fill the space.
