Long-Awaited Job Growth Fuels Nation’s Burgeoning Office Market Recovery

By Elizabeth Jinks, director of research, Carter

ATLANTA (Jan. 25, 2011) – Atlanta’s office market may finally be showing the first signs of recovery, following in the footsteps of national trends, according to year-end 2010 data just released from CoStar Group. 

1100 Peachtree Nationally, CoStar has reported three quarters in a row of positive net absorption, while the Atlanta market posted positive net absorption in 4Q for the first time since 2008. Carter represented landlord Manulife in one of 2010’s largest lease transactions – law firm Kilpatrick Stockton”s renewal at 1100 Peachtree in Midtown, shown at left. Atlanta’s strong performance allowed the market to finish the year with slightly positive absorption (120,280 square feet) after three negative quarters, far better than the negative 2.5 million square feet of net absorption at year-end 2009.  

In what may be an aggressive prediction from Moody’s Analytics, its economy.com website is projecting the creation of 3.2 million new jobs nationwide in 2011, and more than 6 million combined over the next two years. If on target, the corresponding increase in demand for office space generated by this job growth would be a game-changer for the commercial real estate industry across the country.  

Atlanta-based, nationally-recognized economist Rajeev Dhawan of Georgia State University recently projected positive job growth of 44,800 jobs for metro Atlanta in 2011. These gains will followed by 55,500 news jobs in 2012, he projected at GSU’s Economic Forecasting Conference in November 2010. Dhawan also predicted the unemployment rate in Metro Atlanta to decrease from 10.1 percent at year-end 2010 to 9.2 percent over the next two years. While the news for the future is positive, the current unemployment rate of more than 10 percent continues to degrade consumer confidence across the board.

While job growth should drive demand for office space, challenges for commercial real estate still exist. The trend for average square foot of office space per employee is down from 250 to 200 square feet as corporations emerge from this latest downturn with increased efficiencies. Many office tenants are also upgrading from Class B to Class A space to take advantage of the current commercial real estate market conditions and trade up to higher-quality space for the same price. With continued downward pressure on rental rates, many tenants can afford higher-quality space.

Also, space users are moving toward shorter-term leases for increased flexibility to match their evolving, and in some cases, uncertain business plans. In fact, according to CoStar, average lease terms over the past 15 years nationwide have decreased from 11 years to just five years. However, these shorter lease terms will result in elevated leasing activity totals in the brokerage industry, due to the increase in the sheer volume of transactions.

CoStar reported that 2010 posted the lowest level of new construction deliveries nationwide ever and projects numbers to stay low for the next few years due to the long lead times to build office new product. Unbelievably, only 1 million square feet of office space broke ground in the entire United State, based on an inventory of 10 billion square feet.

New construction in Atlanta is down 97% from its historical average, with just 155,000 square feet of office space under construction across the entire metro area. This is down from 1.9 million square feet at this time last year, and there were no new speculative construction starts at all in the fourth quarter 2010.

The massive decrease in office building construction will help lower vacancy rates at a faster pace. The year-end 2010 overall vacancy rate for the metro Atlanta office market for Class A, B & C space was 19.9 percent, up from 19.2 percent one year ago. Atlanta ranks in the middle nationally. Metro areas such as San Francisco and Boston with established technology corridors, and markets such as New York and Chicago with historically lower vacancy rates, are experiencing improvements in vacancy rates at a faster pace than Atlanta is.

Nationally, rents have stabilized in markets where vacancy rates have already started to improve, and have even risen in some cities across the U.S. In Atlanta, rental rates right now are at historical lows.  The average quoted rental rates for all classes of office space at year-end 2010 was $19.67, down from $19.77 last year.

Historically, rental rates lag vacancy upticks. So with projected job growth, very little new office space under construction, and improving real estate market conditions, tenants seeking new space or long-term renewals will want to consider locking in rates now.

 

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