Tenants Gobbling Up Office Space--But Not Downtown

The improved leasing activity reduced the overall vacancy level to 21.4% from 22.3% in the first quarter and increased the average rental rate slightly to $18.74 per sf. "This could mean some landlords have begun recognizing the market's improvement and have chosen to reduce incentives that tenants have come to know and love over the past year," says Colliers Cauble research director Scott Amoson. The Downtown and Northlake submarkets were the only losers in the leasing category. Downtown showed a negative net absorption of 160,454 sf; Northlake, a negative 406,255 sf. The eight other submarkets were all in the positive absorption column.

Midtown, battling Downtown for major tenants, had positive absorption of 749,397 sf, with 755,402 sf in the class A sector. Vacancies, however, stood at 21.3% with 3.4 million sf available. Buckhead, another Downtown rival, had positive absorption of 365,769 sf. Of that total, 179,935 sf was in class A space and 192,606 sf in class B. Buckhead's vacancies are 19.2%.

"Despite having a dismal first quarter, due to large moveouts, including Allitel and Novartis Ophthalmics, the North Fulton submarket posted office absorption of almost a half million sf in second quarter," says Amoson. "A multitude of deals, ranging from 10,000 sf to 50,000 sf were the source for North Fulton's improvement."

The office market highlight of the quarter was the delivery of 528,000 sf of class A space in April at Midtown's $2-billion Atlantic Station redevelopment project. The space at the 171 17th Street Building was delivered in a 74% leased condition, accounting for more than half of the total absorption in Midtown, Amoson says. Construction levels remained steady for the second quarter with 1.6 million sf of new product under construction.

"In spite of Atlanta's positive trends, a key factor affecting the market is the pace of economic improvement," the Colliers Cauble researcher notes. "The belief still remains that vacancies will continue decreasing and absorption levels will continue improving. However, the rate at which these occur will continue to be slower than previous recoveries."

Amoson says job growth for the metro area is "the key factor affecting demand levels for office space." He adds, "It is expected Atlanta will be one of the leading cities in job creation for 2004, according to local economists."