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Market Intel, Forecasts & Strategies

Office Expansion Going at Same Slow Pace as Recovery, While Metros Show Strength

U.S. and Atlanta Market Update

The current expansion is now seven quarters longer than the previous expansion, according to REIS’ Q2 2017 Office Trends report.  It’s not that there’s nothing to report, it’s just more of what REIS calls the same “lackluster pace”. 
Nationally, in Q2 2017, net absorption was the lowest it’s been in three years and the vacancy rate remains flat. Net absorption was 3.3 million SF and vacancy was 16.0%, down 10 basis points since Q2 2016. New construction in the quarter was 7.5 million. This number is low by historical standards, but REIS expects stronger construction throughout the remainder of 2017 vs. 2016, “which means that the vacancy rate could continue to stay flat as occupancy grows at or near the same pace as new completions just as it has over the last two years.” Because of this, rent growth is expected to remain low this year and next. Nationally, asking and effective rents have both increased by 1.6% year-over-year. “This the lowest annual rate of rent growth since 2011,” said REIS. 

There is more of a metro story than a national one in Q2, compared to Q1. The metros with the highest annual rent growth numbers were consistent with the top 12 metros for annual job growth. 222,000 jobs were added in June and the unemployment rate was 4.4%, according to the U.S. Bureau of Labor Statistics. This is the second-highest monthly gain in job growth this year. Annual job growth remained at 1.6%, only 10 basis points (bps) less than June 2016. Annual job gains were 2.238 million, reported Axiometrics. Job growth has accelerated in 22 metros this year.

Eric Harris

Among them, Atlanta – a metro whose office market has plenty to brag about. “Atlanta has outperformed national averages in most categories and is poised for growth as office space that has been under construction is beginning to deliver.  Our growing Tech Market, attractive cost of living and impressive rental rates will continue to support Atlanta’s growth,” said Eric Harris, SVP, Corporate Office Services with Bull Realty. Atlanta is 4th and 5th for annual asking and effective rent growth respectively, both of which were 3.4%, according to REIS. 

Atlanta is currently third in the nation for annual job gains, with 81,900 jobs gained in the past 12 months. Atlanta is 5th nationwide for effective rent growth in Q2, with a 1.1% increase in the quarter to an average effective rent of $19.40/SF. Charlotte, Seattle, San Antonio and Raleigh-Durham were the only metros that saw higher quarterly effective rent growth. The national average asking rent of $32.24 per square foot, was an increase of 0.4% in the quarter and 1.6% from Q2 2016. The average effective rent increased by 0.3%. 

Costar predicts that the Atlanta office fundamentals will remain strong. “Combining this lack of deliveries with job growth that has been outperforming the national average since 2012, vacancies have naturally compressed below the historical average and rents have rebounded strongly, especially in core submarkets,” said CoStar in the Atlanta Office Market Analysis and Forecast report. In Atlanta, the average quoted rate within the Class-A sector was $27.63 at the end of Q2, while Class-B rates stood at $18.63, and Class-C rates at $15.19, reported CoStar.

Park Center - State Farm Phase II

During Q2, 18 buildings totaling 1.5 million SF were completed in Atlanta. (This is a significant increase from the seven buildings totaling 122,244 SF that delivered in Q1.) Notable deliveries thus far in 2017 include Three Alliance Center, (52% occupied) and Riverwood 200, (82% occupied), according to CoStar. 5.3 million SF of office space was under construction at the end of Q2. The largest projects underway are still Portman Holdings’ Coda Tech Square, a 760,000 SF building that is 61% pre-leased and Park Center – State Farm Phase II, a 670,00 SF facility that is 100% preleased. 

Bull Realty Research, Inc.