Class A Remains Positive, while Class B properties continue to struggle.
EXECUTIVE SUMMARY
Quarter In Review
The Atlanta office market remains resilient through the third quarter of 2024, with Class A office space leading the way. Positive net absorption of 568,797 sq. ft. for Class A properties demonstrates ongoing demand for high-quality office space, as companies continue to prioritize modern, well-located buildings. This strong performance in Class A spaces is helping to offset challenges faced by older Class B properties, which recorded negative absorption.
A notable trend benefiting the market is the decreasing supply of new office construction. With fewer projects being delivered and the construction pipeline shrinking by 40% over the past year, this reduction in new supply is expected to stabilize vacancy rates over time. Rental rates have also seen modest growth, with the overall average increasing to $31.04 per sq. ft., reflecting a 3.2% quarterly rise. Class A properties are achieving record-high rents at $32.70 per sq. ft., affirming Atlanta’s position as a competitive market for premier office space.
As Atlanta continues to attract new businesses and relocations due to its business-friendly environment, lower costs, and skilled labor force, the office market is well-positioned for future growth. The ongoing trend of relocation to Class A spaces and the shrinking construction pipeline suggest that vacancy rates for top-tier properties will decrease further, creating a favorable dynamic for landlords in high-quality office sectors. Overall, Atlanta remains one of the Southeast’s most attractive office markets, offering strong fundamentals and sustained long-term potential.
Atlanta Economic Update
The unemployment rate for the Atlanta metro area increased slightly to 4.0% in August 2024, up from 3.9% in July. This is still below the national average and reflects the region’s continued recovery from pandemic-related job losses. Atlanta’s labor force also reached an all-time high in July, with over 3.3 million people. The total number of jobs in the area was approximately 3.09 million, representing an annual growth of 51,200 jobs.
Job growth in Atlanta remains robust, particularly in sectors such as healthcare, finance, and hospitality, which saw notable gains over the past year. Long-term, the city continues to benefit from lower living and business costs compared to major East and West Coast cities, maintaining its competitive edge in attracting businesses and residents.
MARKET OVERVIEW
Leasing Activity Flat with Last Year’s Levels
The Atlanta market overall had a little under 2 million sq. ft. of leasing activity in the third quarter of 2024, this is roughly equal (down 1%) from the third quarter of 2023. There has also been an uptick in new-to-market requirements. A notable trend amongst leasing activity in 2024 has been an uptick of extra-large transactions to the market. with seventeen new deals signed, along with eight renewals, that were greater than 50,000 sq. ft. Notable recent leasing activity includes Southern Company signing a lease for 265,000 sq. ft. at Midtown Center II, Newell Brands signing a lease for 180,000 sq. ft. at the Queen and Piedmont Healthcare signing a lease for 164,221 sq. ft. at 271 17th Street. On the industry front, AT&T and T-Mobile have both been active in the market with several large new and renewal leases in 2024.
Class A Net Absorption is Positive While Class B Continues to Struggle
Class A Net absorption was a positive 568,797 sq. ft. for the third quarter of 2024. Class B properties, however, were a negative 1,019,249 sq. ft. for the same time period. For the year so far, Class A remains positive with 422,710 sq. ft. recorded through the first three quarters of the year, whole Class B has recorded a negative 1,494,609 sq. ft. for the same time period, reinforcing the split market between newer Class A properties and older commodity type Class B properties that continue to struggle.
Vacancy Rate Increases to 25.2%
The overall vacancy rate in Atlanta’s office market is at 25.2%. Like most major office markets across the country, elevated amounts of sublease space remain a drag on overall market fundamentals. Currently, there is about 8.1 million sq. ft. of sublease space available, this is down about 10% from peak levels seen in Q3 2023.
Under Construction and Deliveries Continue to Trend downward
New deliveries for the third quarter of 2024 have totaled 204,233 sq. ft. This down from the 508,641 sq. ft. delivered in the previous quarter and down almost 75% from the previous year. The under construction is at 1.6 million sq. ft., this has been steadily decreasing over recent quarters and is down 40% from one year ago. On a submarket level, the Midtown submarket currently accounts for more than 70% of all of the office construction underway.
Investment Sales Trends
Over the past year, 115 office properties were sold in the Atlanta office market with an average transaction price of $131 and an average cap rate of 8.2%. Notable sales transactions in 2024 so far include Manulife Investment Management selling The Prosecenium, a 523,071 sq. ft. office building to a joint venture between Town Lane and Cousins Properties for $83,250,000, or $159 per sq. ft. The building was 74% occupied at the time of sale. Shorenstein Properties purchasing 14th & Spring, a 324,000 sq. ft. built in 2022. The property was almost completely vacant at the time of the sale. Also, B Group acquired Ameris Center One and Two (a 534,487 sq. ft. complex) from the joint venture of TPG Angelo Gordon and Trinity Partners. The portfolio was 74% leased at the time of sale.
Rental Rates Up Slightly for the Quarter, But Roughly Flat From One Year Ago
The average annual rental rate (FSG) for Atlanta’s office market is $31.04 per sq. ft. This is up 3.2% from last quarter but essentially flat with one year ago (up 0.1%) up 3 cents from $31.01 in the third quarter of 2023. Class A average asking rates are at $32.70 per sq. ft., while Class B rates are at $23.87 per sq. ft. Newer Class A properties continue to achieve at or near record high asking rates, while Class B more commodity type properties are seeing slight rental rate declines, making rates overall, mostly flat.
Steve Triolet
SVP of Research and Market Forecasting
tel 214 223 4008
[email protected]
