Office Market Rebounds in Q3

Vacancies are at 20.1%, down from 21% in the second quarter. Net absorption is a positive 1.2 million sf but still below the record two million sf set in the second quarter.

Construction of new product has slowed with only 43,000 sf started in the third quarter, "a far cry from the peak construction starts of over one million sf during some quarters in 2001," says Erik Pawloski, research director at Atlanta-based Bullock Mannelly Partners Inc.

"It has appeared that the overbuilding that drove up vacancy rates has, for the most part, muted developers' urges to bring space to market," says Pawloski. The total space under construction has remained constant at about 1.7 million sf for the past three quarters. "A further positive indicator is that of the total space under construction, only 280,000 sf is expected to be delivered during the last quarter of the year."

Pawloski says the local office market "has so much positive momentum that developers are considering new projects in submarkets that currently report the strongest numbers and will most likely lead the recovery." For example, Cousins Properties Inc. plans to build a 500,000 sf, 31-story office tower at the prize corner of Peachtree and Piedmont streets in the affluent Buckhead district, eight miles north of Downtown.

Buckhead has become the main focus of development activity in the past nine months. At least five developers are racing to be first with the newest office product in this submarket. Projects under construction include 1180 Peachtree, a 665,000-sf office tower being developed by Hines; One Centennial in Downtown where Southern Co. will relocate; and Two Buckhead Plaza, a Stafford Properties office development.

Scott Amoson, research director at locally based Colliers Cauble, notes year-to-date net absorption has topped 2.5 million sf and says "it is plausible that the city will finish the year with 3.5 million to four million sf of positive absorption."

Amoson also notes that sublease space continues to dwindle from the market. "Third quarter 2004 marks the third quarter in a row of a decrease in sublease availabilities," the researcher says. A total of nearly 1.2 million sf of sublease space has been either leased or taken off the market since the beginning of the year.

"Things are finally looking up," James Phillpott, research director in the Atlanta office of Cushman & Wakefield, recently told the local chapter of the Appraisal Institute. "The market is slowly absorbing what is now a 4.8-million-sf sublease inventory."

Another bright note is the increase in investment sales in nearly all product categories, Phillpott says. Year-to-date, 23 office buildings have been sold with a total value of $929 million. "This is phenomenal in comparison to 2003 where the 2003 volume was considered a great year with 18 buildings sold, totaling $635 million."

Phillpott predicts that "if fourth quarter closings occur close to current estimates, year-end 2004 will easily top Atlanta's 1998 record of $1.3 billion" in annual sales.