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MARKET REPORT

OFFICE
Atlanta Metro Area Q2/19
Corporate Growth Underpins Office Market Appeal;
Spec Builds Highlight Developer Confidence Office 2019 Outlook

Strong leasing activity bodes well for office market. Atlanta continues CONSTRUCTION:
to build on its reputation as an international city, drawing more corpo-
Development this year will contribute
rations to the metro every year. The draw to Atlanta is driven in part by
3.1 million square feet of office inventory.
easy access to Hartsfield-Jackson International Airport, an educated
labor pool and the relatively low cost of living compared with other pri- 3.1 MILLION SQ. FT.
will be completed
Last year, completions were moderately
lower at 2.8 million square feet.
mary metros. While many other major markets have lost momentum in
employment growth, Atlanta has maintained its strong pace. State Farm’s
increasing presence and NCR’s move into the metro’s core will stimulate
more growth. Other companies that have relocated to or grown their local
VACANCY:
presence include Comcast, with its regional headquarters, Thyssenkrupp,
with its nearly finished tower, and HD Supply, which consolidated into a Vacancy will dip to 15.7 percent at the end
of the year. Last year, vacancy inched up
new office in the Cumberland/Galleria submarket.
10 BASIS POINT
decrease in vacancy
20 basis points.
Steady tenant demand supports rise in speculative office projects.
While overall office construction totals have remained disciplined, there
has been an increase in speculative office space in the pipeline. The 725
Ponce office building, anchored by an urban Kroger on the ground floor,
has leased fewer than 20 percent of its 370,000 square feet of rentable
RENTS:
area. The T3 West Midtown at Atlantic Station, another large office The average asking rent will climb to
$25.60 per square foot in 2019. Since
project, consists of 230,000 square feet of available space. The impact
of projects like these may lift vacancy and limit rent growth in specific 4.3% INCREASE 2015, the annual rent growth has aver-
submarkets. However, the metro’s tenant demand and economic stability in asking rents aged 5 percent.
should help with absorption once the properties are completed.

Investment Trends
• Deal flow lightened over the past 12 months, decreasing by roughly 18
Local Office Yield Trends percent from the previous period. The slowdown in activity is a result of
h limited available inventory in the market.
12.0%
• Investor interest is shifting to the suburbs, where more medical office
space and Class B/C properties are being listed. Midtown, Buckhead
10.5%
and Downtown Atlanta office properties are performing well, but few
Average Rate

owners are interested in parting ways with their properties in the


9.0%
current market.

7.5% • Average cap rates in the metro have slipped 20 basis points to 7 percent
over the past year ended in March. Stabilized office properties with
6.0% strong tenants in place are trading with initial yields ranging from the
* 01 03 05 07 09 11 13 15 17 19*
mid-6 to mid-7 percent area. Medical office assets in the metro are trad-
ing with a broader range of initial yields. These properties are providing
first-year returns between 5 percent and 8 percent depending on the
Sales Trends
quality of the tenant.
Sales Price Growth
* Cap rates trailing 12 months through 1Q19
er Square Foot

Sources: CoStar$200
Group, Inc.; Real Capital Analytics 40%
Year-over-Y

$150 20%
Employment Trends 1Q19
Local Office – 12-Month
Yield Trends Trend
Employment Growth Office-Using Emp. Growth EMPLOYMENT
6% 12.0%
2.2% increase in total employment Y-O-Y
Year-over-Year Change

3% 10.5%• The number of jobs created increased year over year at the end

Average Rate
of the first quarter. More than 60,000 new positions were opened
0% 9.0% over this annual period.

-3%
• Office-using positions climbed by roughly 12,000 roles, a 1.5
7.5%
percent advance. The professional and business services sector
-6% 6.0% was the largest contributor, adding more than 13,000 positions
09 10 11 12 13 14 15 16 17 18 19* during
01 the period.
03 05 07 09 11 13 15 17 19*

Office Supply and Demand Sales Trends


Completions Absorption Sales CONSTRUCTION
Price Growth
6
Average Price per Square Foot
$200 40%
2.7 million square feet completed Y-O-Y

Year-over-Year Growth
Square Feet (millions)

3
$150 • Over the past year ending in March, the 20%Atlanta market received
2.7 million square feet of office space, down from the previous
0
$100 period’s addition of 4 million square feet.0%

-3 $50
• Midtown received the bulk of the metro’s first-quarter deliveries
-20%
as the largest completion slated for this year, Coda, came online.
-6 $0 The building boosted inventory by 670,000 -40%square feet.
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

Vacancy Rate Trends


Metro United States VACANCY
24%
no change in vacancy Y-O-Y
20%
• Vacancy held flat at 15.6 percent on net absorption of 2.4 million
Vacancy Rate

square feet of space after inching up 20 basis points in the


16%
previous annual period.

12% • Class A vacancy dipped 10 basis points to 18.3 percent. The


decrease was offset by the 10-basis-point rise in Class B/C
8% vacancy to 13.1 percent.
09 10 11 12 13 14 15 16 17 18 19*

Asking Rent Trends


Metro United States RENTS
8%
3.8% increase in the average asking rent Y-O-Y
Year-over-Year Change

4%
• The average asking rent for office space in the Atlanta metro in-
creased 3.8 percent to $24.91 per square foot during the annual period
0%
ending in March. This is down from the prior four quarters, when the
average marketed rate grew 5.5 percent.
-4%
• The Buckhead submarket posted the greatest jump in average asking
-8% rent, ascending 6.1 percent to $33.81 per square foot. Rent growth was
09 10 11 12 13 14 15 16 17 18 19* limited in South Atlanta, rising 1.3 percent.

* Forecast
Source: CoStar Group, Inc.
Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 2.1% Metro 20.7% Metro 282


U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

Office Square footage*

31.6% Urban

2019 Office-Using Job growth Population of Age 25+ 32.0% U.S. Average
Percent with Bachelor Degree+**
Metro 1.1% 68.4% Suburban
U.S. Average 1.7% Metro 36.1% 68.0% U.S. Average

U.S. Average 29.9% *1Q19


**2018

SUBMARKET TRENDS SALES TRENDS


Investors Search for Value-Add Amid Period of
Lowest Vacancy Rates 1Q19
Employment Trends Strong Price Appreciation
Local Office Yield Trends
Employment Growth Office-Using Emp. Growth • Investors continue to show interest in repositionable assets with
Y-O-Y Average
6% Vacancy Y-O-Y % high vacancies
12.0% that can be leased up quickly following improvements.
Submarket Basis Point Asking
Rate Change
Change Rent These properties typically trade with cap rates north of 8 percent.
Year-over-Year Change

3% 10.5%
• Sales prices appreciated by double digits over the past four quarters,
Downtown Atlanta 10.0% -70 $25.01 5.3%
Average Rate

lifting the average price to the mid-$190 per square foot range. Com-
0% 9.0%
Northlake 12.3% 30 $20.79 4.1% petitive bidding and strong rent growth drove the advance.

-3% Outlook: Atlanta’s


7.5% strong fundamentals and economic growth will influ-
South Atlanta 12.9% -100 $18.60 1.3%
ence continued investment activity on office products moving forward.
-6% Limited listings
6.0%and heavy buyer interest will likely maintain competi-
Midtown Atlanta 09 10 15.3%
11 12 320
13 14 15$34.36
16 17 5.5%
18 19*
tion in the market. 01 03 05 07 09 11 13 15 17 19*

North Fulton 15.6% -40 $23.86 2.6%

Office Supply and Demand Sales Trends


Northwest Atlanta 16.6% -50 $23.57 3.1%
Completions Absorption Sales Price Growth

Buckhead 6 16.7% 20 $33.81 6.1%


Average Price per Square Foot

$200 40%
Year-over-Year Growth
Square Feet (millions)

West Atlanta 3 17.1% -120 $17.91 3.8% $150 20%

Northeast Atlanta 0 19.4% -70 $18.12 2.3% $100 0%

Central Perimeter -3 20.3% 40 $27.39 1.5% $50 -20%

Overall Metro -6 15.6% 0 $24.91 3.8% $0 -40%


09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19*

* Trailing 12 months through 1Q19 over previous time period


Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States

24%
1Q19* Office Acquisitions CAPITAL MARKETS
By Buyer Type
Cross-Border, By DAVID G. SHILLINGTON, President,
11.6%
Marcus & Millichap Capital Corporation
Other, 6.0%
Equity Fund • Ongoing trade concerns weigh on growth outlook; Fed plots next
& Institutions, 32.9% steps. Amid rising trade tensions between the U.S. and China and
slowing global growth, the outlook has turned more cautious. Mar-
ket volatility, along with a flight to safety trade, has flattened the
yield curve dramatically, with the 10-Year Treasury trading below
Private, 45.1%
Listed/REITs, 4.4% 2.2 percent. This has pushed the broader yield curve into inversion,
a closely watched precursor to a potential recession. Meanwhile,
many measures of the domestic economy remain buoyant, includ-
Office Mortgage Originations ing continued job and wage growth, historically low unemployment
By Lender and muted inflationary pressure. These conditions have prompted
a dichotomy, with Federal Reserve officials signaling more accom-
100%
modative policies. The impending end of quantitative tightening in
Percent of Dollar Volume

September, coupled with potential cuts to the Fed funds rate in the
75% Nat'l Bank/Int'l Bank
second half of the year, highlight the shift in Fed policy. As a result,
Reg'l/Local Bank
CMBS long-term interest rates are likely to remain subdued, with Fed
50%
Financial/Insurance policy leaning toward accommodation.
Pvt/Other
25%

• Conservative underwriting balances abundant marketplace


0% liquidity. While debt availability for office assets remains widely
14 15 16 17 18
available from a wide range of sources including local, regional and
national banks and insurance companies, sentiment surrounding
* Trailing 12 months through 1Q19
Include sales $2.5 million and greater the health of the economy has fallen somewhat in recent months.
Sources: CoStar Group, Inc.; Real Capital Analytics Lenders remain broadly cautious in underwriting, with loan-to-
value (LTV) ratios typically in the 55 to 70 percent range, depend-
ing on the borrower, asset and location. The conservative approach
National Office and Industrial Group has filtered into a focus on proven property results, with much less
Alan L. Pontius willingness to lend against pro forma rents. This has prompted
Senior Vice President, National Director | National Office and Industrial Group investors to turn toward short-term mezzanine debt and bridge
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com loans to cover capital improvements, while seeking long-term
solutions once returns have been solidified. Construction origina-
Prepared and edited by
tion remains muted, with lenders focusing on core locations with
Jonathan Ferrendelli
Research Associate | Research Services
proven demand.

For information on national office trends, contact:


John Chang
Senior Vice President, National Director | Research Services Atlanta Office: Michael Glass First V
Tel: (602) 707-9700 | john.chang@marcusmillichap.com michael.glass@marcusmill
Michael Fasano First Vice President/Regional Manager
1100 Abernathy Road N.E., Bldg. 500, Suite 600 Cleveland Office:
Price: $250
Atlanta, GA 30328 5005 Rockside Road, Suite 8
(678) 808-2700 | michael.fasano@marcusmillichap.com Independence, OH 44131
© Marcus & Millichap 2019 | www.MarcusMillichap.com (216) 264-2000

Columbus Office:
230 West Street, Suite 100
Columbus, OH 43215
(614) 360-9800
Austin Office:

Craig Swanson Vice President/Regional Manager


9600 North Mopac Expressway, Suite 300 Cincinnati Office:
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate
Austin, and complete information; however, no representation, warranty or guarantee,
TX 78759
(512) 338-7800
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment is calculated based on the last month of the quarter/year. Sales Colby
| craig.swanson@marcusmillichap.com
growth data Haugness Reg
600 Vine Street, 10th Floor
includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide
Cincinnati, OH 45202
specific investment advice and should not be considered as investment advice. (513) 878-7700 | colby.haug
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau

Baltimore Office: Tim Speck First Vice Pr


tim.speck@marcusmillicha