Richard Bowers & Co. Releases Its 2009 Third Quarter Office Market Report
October 12, 2009
Due to the struggling economy, the third quarter of 2009 was another dismal one for the Atlanta office market with nearly 59,000 square feet of negative absorption. This is the fourth consecutive quarter of negative absorption and the second longest period of negative absorption since Richard Bowers & Co. started tracking the Atlanta office market quarterly in 1987. However, the rate of decline has slowed considerably: the previous three quarters each showed negative absorption in excess of 300,000 square feet.
Year-to-date 2009 absorption is a negative 746,455 square feet, as compared to third quarter 2008’s positive absorption of 717,774 square feet. The leading submarkets in absorption this quarter are the I-75/I-285 submarket with 116,123 square feet, followed by Midtown at 81,664 square feet and the Northeast Expressway-North submarket at 73,027 square feet. Nine of the sixteen submarkets recorded negative absorption this quarter, but most of the negative postings were relatively small.
The urban submarkets continue to outperform the suburbs with 126,432 square feet of positive absorption year-to-date, versus the suburbs at 872,887 square feet of negative absorption for the same period. With 1,058,051 square feet delivered in the Buckhead/Lenox submarket, the urban corridor now has a lower occupancy rate at 80.87 percent compared to the suburbs, which have had very little new development, at 82.38 percent. The urban corridor continues to record significantly higher average rental rates at $24.58 per square foot versus the suburbs’ $20.06 per square foot. Urban occupancy over the last year has decreased from 83.59 percent to 80.87 percent. Overall available space has also increased from the third quarter of 2008 at 20,673,141 square feet to 24,269,802 square feet in the third quarter of 2009.
This quarter metro Atlanta delivered 1,295,143 square feet in four buildings: 564,850 square feet at Terminus 200 and 493,201 square feet at Two Alliance Center in Buckhead; Gateway Center containing 128,396 square feet in the Airport/South Submarket; and One Sugarloaf Centre containing 108,696 square feet in the Northeast Expressway-North submarket. With two major deliveries, the Buckhead/Lenox submarket has displaced Midtown as the fifth largest submarket in square footage at 14,353,142 square feet. Of the 1,058,051 square feet delivered in Buckhead/Lenox, only 57,598 square feet is under lease, boosting that submarket to third place in available square footage.
Due to the weak economy, only three buildings are currently under construction—all of which will deliver in 2010: two in Buckhead, 3630 Peachtree Road containing 441,384 square feet and Phipps Tower containing 486,917 square feet, and 12th and Midtown delivering 719,003 square feet totaling 1,647,304 square feet. With existing space availability and unless there is significant preleasing, it is doubtful the Atlanta office market will commence construction on any new space until possibly 2012 or even later, depending on how the economy performs.
Infrastructural improvements include ongoing improvements in Midtown with the opening of the 14th Street Bridge and work continuing on the Midtown access roads, as well as the off-ramp on 17th Street. All of these should dramatically improve Midtown’s accessibility. Delta and Hartsfield-Jackson International Airport have finally reached an agreement, and the new International Concourse is continuing forward as planned. In addition, the new car rental facilities at the airport—interconnected by a tram system—are being completed and are scheduled to open in November 2009.
Commuter, passenger, and high-speed rail are all being more strongly considered and supported than in the past. Commuter rail is the answer for Metropolitan Atlanta’s traffic congestion, ongoing growth, reduction in sprawl, and air quality that are sorely needed as an alternative to the automobile. Commuter rail will revitalize many of the outlying suburban communities, creating world-class commuter cities and reconnecting the metro Atlanta region. Water is apparently going to be a future problem for Atlanta, but we believe this tri-state conflict will be resolved. Fortunately, no water problem exists today after our five year drought has seemingly ended.
Despite the current weak economy and negative absorption, the outlook for Atlanta’s office market is positive. Economic development activity is brisk, according to the Metro Atlanta Chamber of Commerce, Georgia Power Company, and the Georgia Department of Industry and Trade. In fact, a number of companies are considering Atlanta positively, due to its airport, climate, attractiveness, cost of living, and educated workforce. NCR recently announced its decision to move their corporate headquarters to Atlanta, which is a huge positive.
But for the 50,000 office workers who have lost their jobs in the last two to three years, the Atlanta office market would very likely be in excess of 90 percent occupancy. For the decade of the nineties, 30 million square feet of office space was delivered, and the metro Atlanta region grew by approximately one million people, driving the office market from 82 percent to 90 percent occupancy. In this decade however, approximately 24 million more square feet have been delivered—a 20 percent decrease in development. Meanwhile, the Atlanta metro area grew by approximately 1.5 million people, with occupancy decreasing from approximately 90 percent to approximately 82 percent. Once the economy improves and hiring resumes, the office market should rebound sharply—particularly with little or no new development for several years.
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