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Growth Leader Gropes For Office Antidote

What U.S. city has outpaced the nation in population and labor growth since 2000, but still finds its sprawling office market idling in the doldrums? The answer is Atlanta, the largest city in the Southeast, where attractive demographic and economic trends are having a muted effect on office vacancy and rental rates.

Recent Census Bureau research determined that Atlanta added more residents than any other metropolitan area between 2000 and 2006. The influx of roughly 890,000 new residents also pushed Atlanta’s local population up to 5.1 million as of last July.

It was a similar story on the jobs front. Labor growth increased by an average of 4.7% annually between 2000 and 2006, outpacing the national average of just 3.3% during that period.

“It is interesting that the Atlanta office market remains so weak despite all of its population and labor growth,” says Bob Bach, national director of market research at real estate services firm Grubb & Ellis.

The metro Atlanta office market registered 19.1% vacant at the end of 2006, down just 1.0% from the end of 2005 — a high number when compared to the national average of 13.1% at the end of December, according to Reis Inc.

Watering down the equation is the ongoing development of new space. At the end of the fourth quarter, there were more than 2.7 million sq. ft. of office space underway throughout the entire Atlanta metro area.

“We have historically overbuilt in the Atlanta market,” says Karen Burkhart Dick, executive vice president at Atlanta-based office investment firm Ackerman & Co. The company owns and manages roughly 4 million sq. ft. of Atlanta office space.

Office rents have risen marginally over the past 12 months, reports Reis, though Class-A asking rents did climb by a meager 0.8% during the fourth quarter of 2006, up 2.1% from a year-ago. Atlanta’s Class-A average office rents are now “a bargain compared to competing metropolitan markets,” reports Grubb & Ellis.

Burkhart Dick acknowledges that most of the new office space was “capital driven” rather than spurred by obvious demand for space. But her view of the Atlanta office market remains positive due to a growing population and stable job base.

“We see a lot of small businesses hiring people in this market, and they’re not tracked by the research firm,” she says, adding that job growth is likely stronger than most analyst reports currently show.

Most investors believe that population and job growth will ultimately create demand for income-producing properties like office buildings. But cheap debt financing and rosy economic forecasts have persuaded lenders to finance an increasing amount of new — chiefly speculative — office projects in and around Atlanta.

The big question for Atlanta office landlords is whether projected demand can come close to filling the new supply. To be sure, businesses will lease office space in Atlanta for many logical reasons.

One example is a 2006 analysis by KPMG that ranked Atlanta as the least expensive city in the nation with business costs 3.5% below the national average. Lower business costs can translate into higher salaries, and that’s an important weapon in the battle for talent today.

But there are also downsides to relocating into Atlanta. For one thing, the city is encircled by a large interstate, I-285, and traffic jams routinely transform routes in and out of the city into parking lots. One contributing factor is the fact that most residents do not use the city’s mass transit system, known as MARTA.

According to the American Automobile Association, roughly 94% of all Atlanta residents commute to and from their offices by car. Atlanta also recently earned the dubious title of “Asthma Capital of 2007” by the Allergy and Asthma Foundation for its severe air pollution and high death rate from asthma. The city ranked fourth in 2005.

“Atlanta has always had a crazy development scene,” says Margaret Stagmeier, principal at local apartment and office owner/manager TransInvest Group. “The developers just have so much land to build on here.”

For now that appears to be the case. But Stagmeier says that several counties outside of the Atlanta metro area are increasingly putting development moratoriums in place. Their efforts could contain the outward press of office buildings being developed around the city.

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