Tearing Up Peachtree

A comedy duo that played in Atlanta in the late 1940s, the Merry Mutes, featured a young Dick Van Dyke, who sang a song that hit a local nerve: “They're Tearing Up Peachtree Street Again.”

Tearing up Peachtree Street, which runs through downtown and the office markets of Midtown and Buckhead, is another way of saying there's a lot of construction going on.

Indeed, Atlanta's industrious office developers will deliver 1.3 million sq. ft. in 2008, 2.7 million sq. ft. in 2009 and 3.3 million sq. ft. in 2010, according to New York-based research firm Reis Inc. About 70% of that space, or 3.2 million sq. ft., is concentrated in the posh Buckhead district. That means absorption in the near term will take on heightened importance. For all of 2007, Buckhead absorbed 646,000 sq. ft.

Trophy buildings such as Cousins Property's 564,850 sq. ft. Terminus 200 and Tishman Speyer's 500,000 sq. ft. Two Alliance Center are scheduled for delivery next year in Buckhead. Their owners will try to lure tenants from older properties.

The onslaught of new space is not the main cause for concern, says senior economist Art Jones of CoStar Group. “The issue is that the employment numbers are really weak in Atlanta in the first quarter.” Job growth in the first quarter slowed to 0.5%, down from 1.3% in the previous quarter.

“We saw a dramatic fallout in mortgage companies over the last three or four months,” says Bill Weghorst, senior vice president of PM Realty Group in Atlanta. “When their money dried up, they just basically turned off the light and threw you the keys and said, ‘It's been fun.' It was almost a situation where the Coke cans and coffee cups were sitting half-full on the desks.”

It is primarily the intown markets that suffer from high vacancy. While downtown Class-A vacancy rates were an unhealthy 24.8% at the end of last year, suburban markets outside the I-285 perimeter were 14.6%.

The slowing job growth, high vacancy rates and new space combined with the ailing financial services sector, has some office owners working overtime to keep tenants in place.

Office building owners are approaching tenants even before leases mature to renegotiate, says Kris Miller, president of Atlanta-based Ackerman & Co., a full-service commercial real estate firm. Landlords are making rent concessions and taking back space in exchange for extended leases.

“I think real rental rates are either flat or falling in every single office market in metro Atlanta right now,” says Miller. “How far they will fall is going to be a function of supply and demand in that submarket.”

Asking rents for Class-A space have dropped from $19.14 to $18.10 per sq. ft. from the fourth quarter of 2007 to the first quarter of 2008, while asking rents for Class B, C and D space sank from $12.80 per sq. ft. to $12.32, over the same period, reports CoStar.

On the upside, Atlanta is home to an impressive roster of Fortune 500 companies including UPS, Coca-Cola, Home Depot and Delta. And the city absorbed about 2.5 million sq. ft. of Class-A space last year.

“Overall the Atlanta office market is fairly healthy,” concludes Miller. “If we continue to have positive net absorption this year, it will remain reasonably healthy.”

TAGS: Office
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