Big Peach Office Sector Seeks Stability

Lowlights of the past year include a marketwide vacancy rate that tipped beyond 20%, negative absorption of nearly two million square feet and the prospect of just as much new space opening with very few tenants. Yet on the bright side, sublease inventory does not measure as much as in the early 2000s and asking rents appear to be holding steady at just under $25 per square foot.

"Additional increases in vacancy are expected in 2010, but leasing activity in the last quarter of 2009 suggests that momentum and confidence may be returning," says Clark Gore, Atlanta market director with Jones Lang LaSalle. He points out that the market gained in new leasing activity late last year, rather than relying strictly on renewals.

"This is akin to consumer confidence indexes in the general economy," Gore notes in JLL's Atlanta Urban Skyline Review. "Tenants see a more stable market and have more confidence in leasing decisions."

While the Atlanta office market saw 1.5 million square feet of leasing activity in the fourth quarter of 2009, the lowest level in recent memory, firms representing 3.6 million square feet are currently scouting the market for space, JLL reports. Space demand should rise slowly this year as prospective tenants capitalize on cheaper rent and other landlord concessions.

"If it's darkest before the dawn, it's time to start the coffee because the combination of very low rates and a recovering economy will generate market activity," says Ken Ashley, senior director with Cushman & Wakefield in Atlanta. The brokerage predicts that tenants will continue seeking value as payrolls gradually expand later this year.

The local office market is expected to stabilize in the second half of this year, with sustained recovery taking hold in early 2011, Cushman & Wakefield stated in its latest research report. Also, construction activity is expected to taper off after the 1.7 million square feet currently under way is completed.

Meanwhile, there is potential trouble for the two million square feet of offices that opened over the past year, with only 16% of space leased and only 10% preleasing for buildings now under construction, Cushman & Wakefield reports. Key additions to the market include the Two Alliance Center and Terminus 200 towers, both in the Buckhead submarket.

While the financial and housing sectors have taken a toll on Atlanta office space, not all is dire heading into this year, according to Colliers International. The city's technology sector will get a boost this year with companies such as NCR, FirstData and Sony Ericcson relocating their corporate headquarters to the market, generating up to 2,250 jobs.

JLL also points out that the current downturn is not as bad as the one following the dot-com bust in 2000-01. For example, asking rents have declined 4.6% since their 2008 peak, compared with an 11.7% falloff earlier in the decade, and far less space is being delivered now than the 13.6 million square feet that came to market back then.