Will Demand for Atlanta Office Space Push Beyond the Urban Core?

Market Insights
February 25, 2016

Keith DeCosterDirector of U.S. Real Estate Analytics

The highest-caliber buildings in Buckhead and Central Perimeter are breaching rent levels that were considered unattainable just a few quarters ago. The resurgence of corporate relocations from higher-cost markets has played a role. Most companies coming from metro areas such as San Francisco and New York are not as sensitive to a $3.00 or $4.00 per SF gap between new space and second-generation buildings, and wider gaps between space in Buckhead and Downtown or Alpharetta.

However, price-sensitive law firms and general professional/business services companies are taking a closer look at areas such as Northwest and Downtown Atlanta that offer bigger block value-plays. As the rental rate gap widens, the rationale for creative adaptive re-use projects will grow. Developers who offer tenants greater efficiency options are likely to have a leg up. Some tenants will relocate and pay a higher base rent if they can save over the term of the lease due to a space that is 15% to 20% smaller than their current space.

Developers, contractors and engineers have been expanding in suburban submarkets of late:

  • MacTec Inc., an engineering and consulting company, signed a five-year extension for its 57,642-SF space at 1075 Big Shanty Road in Northwest Atlanta.
  • In North Fulton, engineering consultant Arseal Technologies signed a 15,194-SF lease at Northwinds Summit.
  • Another North Fulton company, Amec E&I Holdings, renewed its 38,218-SF lease at 1105 Lakewood Parkway.
  • Holder Construction pre-leased 55,964 SF at the Riverwood 200 building in Northwest Atlanta. Highwoods hopes to finish the 299,125-SF property in July of 2017.

In the early stages of this most recent recovery cycle (2010-2013) preference among tenants for the urban core and ex-urban Central Perimeter was much more apparent than in 2005 - 2006 when tenants took space all across the region but in suburban locations in particular. Leasing in the urban core between 2010 and 2013 totaled 14.6 MSF (39.0% of overall volume) and Central Perimeter accounted for 6.0 MSF (18.3%). Between 2003 and 2007, the urban core tallied 13.5 MSF of leasing but only accounted for 27.8% of volume as tenants preferred Central Perimeter and Suburban product.

It remains to be seen whether tenants will revert to older patterns of taking space in suburban office parks beyond the Urban core as well as the Central Perimeter, particularly as the pricing gap between suburban and urban properties widens.

As law firms and other major corporate tenants think about long-term recruiting strategy, more are factoring in the preference of millennials for an urban setting and a live/work/play environment. Tight conditions in Buckhead might give such businesses an incentive to consider a move. Some are weighing two options: follow the path of residential developers and go with in-town buildings within walking distance of nightlife, culture and abundant multi-family/condo construction; or push out to the Perimeter for higher cost savings. The extension of MARTA and development of residential and retail product along the transit system’s spine could eventually alleviate some of the disadvantages of suburban product.

Keith DeCoster

Keith oversees the production of local and national market materials. Keith also collaborates with his colleagues across the U.S. and Europe, specializing in reports and insights that highlight the impact of economic trends and market fundamentals on tenants.