"Absorption of Atlanta office space is picking up after a three-year downturn, offering opportunities for investors and causing tenants to accelerate expansion plans," says Marcus & Millichap analyst Glen H. Atkin. "With strengthening fundamentals and cap rates over 7%, investors are able to buy into healthy income streams with upside potential."

However, Atkin cautions Atlanta's economy continues to expand "but the rate of growth has slowed." He says employers are expected to add 13,000 new positions, down from the 29,000 jobs added in 2004.

On the leasing side, the analyst notes "many tenants have moved up their expansion plans but are taking advantage of still elevated vacancy and favorable lease terms by upgrading to higher-quality space." Atkins says "competition among owners for tenants is fierce, but with the local economy remaining strong and the metro's stature as preferred corporate center not in doubt, the prospects for Atlanta office properties will continue to improve."

Rent growth "has returned to positive territory but will not accelerate until vacancy tightens further," Atkin says. "Effective [overall] rents, though, are on pace to grow 1.8% this year to $16.45 per sf." Asking rents are highest in the central submarkets, ranging from $22 per sf Downtown to $24 per sf in Buckhead.

Rents in the Cumberland submarket are highest among suburban areas at $20 per sf. In the outlying areas, asking rents range from $15.50 per sf to $16.50 per sf. Atkin says class A space continues to account for over half of the total, with average asking rents of $23 per sf, compared to $16.50 per sf for class B and class C space.

Downtown vacancy "will remain relatively low," Atkin predicts, largely due to little new construction. He says most sublease space in the three central submarkets is now leased out. But Atlanta's largest submarket, the 27-million-sf Central Perimeter, is "suffering with vacancy over 30% and will continue to under perform as traffic congestion keeps businesses away." The Cumberland submarket, however, "continues to attract corporate tenants seeking lower cost locations outside of the Downtown area."

Working with Atkin on the report were John M. Leonard, regional manager in Marcus & Millichap's Atlanta office; Alan L. Pontius, senior vice president and national director of Marcus & Millichap's National Office and Industrial Properties Group; and Erica L. Linn, national research manager in the company's Encino, CA headquarters.