Atlanta's Office Market Banks Trophies

ATLANTA—The competition is building in Atlanta's office market as high net worth investors and international sovereign wealth funds vie for a shrinking supply of trophy buildings in gateway markets. At the same time, rising rents in institutional office buildings in Atlanta creating a landlord-friendly market.

All this is according to JLL's Spring 2014 U.S. Skyline Review. In Atlanta, JLL focused on office buildings in the Buckhead, Midtown, and Downtown submarkets.

“The bigger issue in Atlanta is the limited availability of trophy assets,” says Chris Marshall, managing director of Capital Markets, in JLL's Atlanta office. “A lot of the trophy assets were sold in the last cycle. There are fewer assets on the market for sale, so demand will continue to increase for the properties that become available.”

Competition for office properties across US skyline cities in 2013 propelled vacancy levels to an average 13.4% and 170 basis points below the US office sector. In 2013, seven Skyline buildings were sold in Atlanta totaling 3,425,995 square feet, a 51.6% decrease in sales volume. However, those sales totaled $298 million, a decrease of only 5.9% in the dollar amount of sales.

“Investors across the spectrum continue to narrow their focus to the skylines of their respective markets—bidding for not only the top-tier, trophy assets but also the value-add properties in the mix,” says Steve Collins, international director at JLL. "Anything to garner an asset within the skyline.

“Primary markets such as New York, San Francisco and Chicago saw year-over-year investment sales growth of more than 43%, but they're not the only beneficiaries. Secondary markets such as Raleigh, Miami and Philadelphia experienced pricing gains per square foot that exceeded their primary brethren.”

According to JLL, Atlanta's skyline buildings are commanding a significant amount of attention from tenants. Over 2 million square feet of active requirements are focused intown, fueling expectations that a majority of available trophy and class A blocks could fill up throughout 2014.

As the local economy continues to expand, JLL predicts office fundamentals will continue tightening. Rental rates will keep climbing and open up the viability of new multitenant office development for the first time since 2009.

Ignored urban micro-segments will see a renaissance over the next three to five years, JLL predicts. The firm suggested investors look for Atlanta to be among the cities leading growth in the years ahead.

In Atlanta, there are 12 buildings priced on average from $20 to $24.00 a foot—and they outperformed all other segments with respect to year-over-year declines in vacancy and availability. What's more, those buildings benefitted more from leasing demand than any other price point, representing 45.1% of the total urban net absorption for the year.

Across the U.S, in spite of tightening market fundamentals, construction remains limited. Ten skylines have vacancy levels below 10%, with seven showing no current development and two seeing just one proposed project. The constrained national development pipeline has led to climbing rents: over the past three years, rates in  US skyline markets increased 17.1% compared to the 9.8% increase seen by the broader market.

“The lack of development is causing a space crunch on each end of the spectrum,” says John Sikaitis, managing director of Research at JLL. “Trophy properties are far outperforming the broader market with respect to occupancy levels and rents and a similar tightening exists in value-add properties. This squeeze from both ends is expected to have a significant impact on the properties in the middle as tenants are being priced out of their former go-to options.”