Atlanta Office Market Report Second Quarter 2019 Atlanta Q20192 Office Market
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ATLANTA OFFICE MARKET REPORT SECOND QUARTER 2019 ATLANTA Q20192 OFFICE MARKET ECONOMIC OVERVIEW Atlanta’s economic expansion continues with 52,400 new jobs created over the prior 12-month period ending May 2019, representing a 1.9% annual increase. During the current expansion period, total employment has expanded by nearly 600,000 jobs since its trough in early 2010, which is equivalent to a 26.8% increase over the past 9 years. A significant portion of the annual employment gains were in Professional & Business Services (+18,000 jobs), Education & Health Services (+12,000 jobs), and Leisure & Hospitality (+11,100 jobs). As a result of the strong job growth, the metro area’s unemployment rate has declined 60 basis points to 3.0% over the prior 12 months to hit its lowest level since mid-2001. Although job growth has moderated from their strong levels experienced over the past several years, Georgia State University forecasts 54,400 jobs will be created in 2019, followed by the addition of 40,600 jobs in 2020. Atlanta remains an economic powerhouse as companies flock to the area for its low cost TABLE OF CONTENTS of doing business and proximity to an exceptional talent pool of highly skilled workers created by local universities and a strong workforce. Atlanta’s economic outlook remains ECONOMIC OVERVIEW ...........................................2 positive and makes it one of the best metro areas for companies seeking quality space for relocations and consolidations. As one of the fastest-growing, high-tech urban centers OFFICE MARKET ASSESSMENT .............................3 in the nation, Atlanta is leading the way in creating a national center for innovation and industry growth. Recent corporate expansion announcements by ThyssenKrupp, Anthem, Google, Salesforce.com, Starbucks, InComm, Honeywell, Pandora Media, and NET ABSORPTION & VACANCY ................................4 Zillow provide clear evidence of the area’s attractiveness to employers seeking a highly skilled and educated workforce. Norfolk Southern Corp. has recently chosen to relocate RENTAL RATES & LEASING ACTIVITY ......................5 its corporate headquarters from Virginia to Midtown Atlanta, bringing with it 850 jobs and more than $500 million in economic investment. BlackRock and Accenture are also looking to Midtown for their new innovation centers. BlackRock is considering leasing CONSTRUCTION .....................................................6 more than 200K SF and bringing 1,000 jobs to Atlanta by 2024 while Accenture opened its tech center late last year with plans to create 800 jobs. Employment Trends SUBMARKET STATISTICS & RECENT DEALS ...........7 EMPLOYMENT TRENDS 100 4% THE TEAM ...............................................................8 75 3% 50 2% Thousands 25 1% 0 0% -25 -1% FOR INFORMATION: -50 -2% -75 -3% -100 -4% BILL WEGHORST -125 -5% President, -150 -6% Property Services, Southeast '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 404.671.4702 [email protected] Jobs Added Annual % Change EMPLOYMENT GROWTH BY SECTOR CHARLES ‘CHIP’ ROACH, JR Executive Vice President Atlanta Market Leader 404.671.4705 MINING CONSTR MANUF TRADE, INFO FINANCIAL 0.0% 6.9% 0.3% TRANS 1.1% 2.2% 0.5% [email protected] 0K 8.6K 0.6K 6.5K (2.2K) (0.8K) UNCHANGED JOBS ADDED JOBS ADDED JOBS ADDED JOBS LOST JOBS LOST ARIEL GUERRERO Senior Vice President, Research 713.209.5704 [email protected] PROF, EDUC. LEISURE OTHER GOV’T TOTALS SRVCS 3.5% 3.4% 3.7% 2.4% 0.3% 1.9% 18.0K 12.0K 11.1K (2.4K) 1.0K 52.4K JOBS ADDED JOBS ADDED JOBS ADDED JOBS LOST JOBS ADDED JOBS ADDED Source: U.S. Bureau of Labor Statistics; Employment Data as of May 2019 All Employees, in Thousands PAGE 2 ATLANTA OFFICE MARKET Q20192 OFFICE MARKET ASSESSMENT The Atlanta office leasing market recorded 701,534 SF of direct net absorption during the second quarter, pushing the trailing 12-month total up to nearly 1.9 million SF. Class A properties accounted for the majority of the gains with 507,604 SF of direct space absorbed, pushing the trailing 12-month total up to 1.4 million SF. Most notably, newly built construction projects have captured virtually all of the Class A absorption gains over the past 12 months. The bulk of absorption growth has occurred in the urban core submarkets as Midtown (556K SF), Downtown (275K SF) and Buckhead (262K SF) have collectively accounted for 76% of the Class A direct net absorption gains over the prior 12 months. Atlanta’s office market enjoyed strong rent growth of 6.2% over the prior 12 months, which ranks among the top five U.S. markets. Strong fundamentals in the urban core have dominated the landscape with the largest rental rate appreciation among all submarkets driven by strong leasing activity. Despite sustained leasing demand and asking rents reaching new record levels, the restrained pace of new construction during the current cycle has kept the supply and demand fundamentals balanced. Due to the leasing success ECONOMIC INDICATORS this cycle, several developers have moved forward on several new projects primarily in Midtown as large tenants are scouting the market with future space requirements. Large lease transaction activity during the first half of 2019 was primarily concentrated in the Midtown submarket, which accounted for 1.8 million SF or 53% of the overall market’s K leasing volume involving deals above the 25K SF threshold. The Midtown submarket 52 witnessed a flurry of pre-lease commitments by Invesco (300K SF at Midtown Union), Anthem Blue Cross Blue Shield (275K SF at 712 W Peachtree), Google (161K SF at 1105 JOB GROWTH 1.9% T-12 MOS West Peachtree), Jones Day (116K SF at 500 Colony Square), and Smith, Gambrell & Y-O-Y THRU MAY 2019 Russell LLP (102K SF at 1105 W Peachtree) at 1105 West Peachtree. In the year ahead, a growing economy will continue to fuel leasing demand and encourage tenants to consider newer and more efficient quality space options for relocations and expansions. FORECAST • Class A space will remain in strong demand, as tenants appear willing to pay more for the best space configurations and amenity-rich locations with prime access to MARTA as they seek to retain and attract highly skilled employees. K • The flexible space/coworking sector has emerged as a primary growth driver within 18.0 the office market and shows no signs of slowing. The creative office segment will also OFFICE JOB GROWTH experience strong leasing momentum, as traditional office tenants consider creative alternatives to meet the young talent pools’ growing demands. 34.3% • Increased construction activity is beginning to place pressure on existing office OF TOTAL GROWTH buildings to measure up to the amenities and tenant experiences that new developments can offer. In order to remain competitive, repositioning activity will pick up across the market as owners focus on significant capital improvement programs to enhance their assets. MARKET TREND INDICATORS OFFICE MARKET TRENDS Office Market Trends 4,000 24% Current Change from Previous 12-month 22% Quarter Quarter Year Forecast 3,000 20% Direct Vacancy 15.0% 18% 2,000 16% Direct Availability 18.7% 1,000 14% 12% Direct Net Absorption 1.9M SF 0 10% (T-12 mos) 8% in Thousandsof SF -1,000 6% Under Construction 7.2M SF -2,000 4% 2% Direct Asking Rents $27.56 -3,000 0% '05 '06 '07 '08 '09 '10 '11 '12 '13 14 '15 '16 '17 '18 '19 '20 Direct Net Absorption Completions Direct Vacancy % Direct Availability % PAGE 3 ATLANTA Q20192 OFFICE MARKET NET ABSORPTION & VACANCY • The Class A property sector continues to outperform the broader market with positive absorption in 7 of the previous 8 quarters, totaling 3.5 million SF of direct net absorption over the period, accounting for 91.4% of the market-wide absorption growth. • The Class A property sector ended the second quarter with 507,604 SF of direct net absorption, bringing the trailing 12-month total up to just over 1.4 million SF with the bulk of the leasing gains taking place in newly built projects. • Tenants contributing to the quarterly gains in the Class A sector included McKesson’s 104K SF occupancy at Stonebridge I, CBRE’s 97K SF move-in at Three Alliance Center, Veeam’s 90K SF occupancy at NorthWinds VII, WeWork’s 77K SF occupancy at the Coda project, and Pandora moving into 51K SF at The Campanile Building. • Despite the healthy leasing gains, Class A direct vacancy rates have climbed 30 Bolstered by strong job growth and sustained basis points to 15.5% over the prior 12 months as new supply has slightly outpaced demand for office space across Metro Atlanta, demand with nearly 1.9 million SF coming online over the prior 12 months. landlords are expected to retain their negotiating • Class A direct availability rates have managed to slightly decline by 20 basis points power in lease negotiations, especially for those high-end space options in the urban core to 19.7% since hitting their peak during the third quarter of 2018, but will likely submarkets. creep up over the next year with additional new product coming online. • Class B properties have been impacted by the flight to quality trend but managed BILL WEGHORST to record 210,764 SF of direct net absorption during the second quarter, bringing President, the trailing 12-month total up to 445,963 SF. Property Services, Southeast • The largest quarterly gains in the Class B sector included Home Depot taking 99K SF at 340 Interstate North and FullStory with 49K SF at 1745 Peachtree St NE. • Class B direct vacancy levels improved by 30 basis points to 14.7% during the second quarter and have fallen 50 basis points over the prior 12 months.