As new office towers rise, so do deals for tenants

Friday, April 11, 2008

Atlanta Business Chronicle –
by Douglas Sams Staff writer

In this economy, the sweetest words a company can hear might be “rising profits.”

A close second: “Free rent.”

Companies looking for office space in Atlanta are sometimes getting 10 to 15 months of free rent on long-term deals, according to a new report by the brokerage firm Studley.

And nowhere are those concessions and other breaks expected to be sweeter than in Buckhead and Midtown — magnets for the largest financial services firms and law firms.

In addition to free rent, office tenants pursuing new leases in those submarkets may begin to see landlords offering higher payments for tenant improvements including paint, walls, carpet and in some cases allowances to cover fixtures and equipment.

The reason: a building boom in Buckhead and Midtown that will add more than 4 million square feet of Class A office space. At the same time, tight underwriting standards are forcing developers to hold asking rents close to $30 per square foot.

Unable to budge on their asking rents, landlords are forced to offer other concessions instead.

“If you’re a large tenant, with good credit, it’s the right time to be negotiating in the market,” said Lars Anderson, president of BB&T Georgia.

The bank last summer agreed to become the anchor tenant in the new 25-story tower at 271 17th Street in Atlantic Station, which could be completed by 2009. The bank was offered carrots that included exterior signage on the building.

“There’s clearly softening in the market, and clearly developers are interested in locking up high-quality, long-term tenants,” Anderson said.

Companies seeking space include Seyfarth Shaw LLP, now housed at One Peachtree Pointe, which has been scouting for about 75,000 square feet in Midtown. Oracle Corp. (Nasdaq: ORCL) is looking in Buckhead and Central Perimeter for up to 100,000 square feet, according to sources familiar with the search. And Boston Consulting Group Inc. has recently been eyeing Midtown, among other submarkets.

“Although underwriting standards are requiring buildings to keep their asking rents high, the competitive forces in the market are driving effective rental rates, or occupancy costs, to very attractive lows,” said Josh Hirsh of Studley.

According to the Studley report, Atlanta posted the third-highest increase in concession packages — a 44 percent surge over the past year — trailing only San Diego and Dallas.

During the just-ended first quarter of 2008, vacancy rates for class A office properties were 22 percent in Midtown and 16 percent in Buckhead, according to Dorey Market Analysis Group. Those rates may rise over the coming months and into 2009 as developers complete several buildings.

“It’s difficult to predict how the numbers will bear out, but it’s probably safe to say there’s going to be an increase in vacancy in those submarkets,” said Chris Shaner, head of research for Cushman & Wakefield of Georgia Inc.

“It’s the classic example of market economics at work,” said Bob Voyles, CEO of Seven Oaks Co. LLC, which is developing Riverwood 200, a 15-story building in the northwest submarket scheduled to launch this summer. “In Buckhead, it’s going to be an issue with oversupply. In 2001 the markets were staying right on track with demand. But, now, you look at Buckhead, and the horse is out of the barn. The cranes are up on five buildings. It reminds me a bit of the late ’80s. But, you’re not seeing that in other submarkets.”

Said Bill Weghorst, senior vice president for PM Realty Group and director of the firm’s Atlanta region: “As a whole, it’s really a tale of two cities. Everything in the suburbs is tight because there’s not a lot of office construction. Landlords there aren’t as nervous as those inside 285, where there’s a lot more supply that is coming onto the market.”
Sweet deals

  • Atlanta posted the third-highest increase in concession packages over the past year, a 44 percent increase, trailing only San Diego and Dallas.
  • Landlords have offered higher-value concession packages due to the competition in existing buildings to retain tenants, and in new construction, to attract them.
  • Landlords have increased concessions while generally holding to face rates.
  • Midtown vacancy rate: 22 percent, but expected to rise over the next several quarters.
  • Buckhead vacancy rate: 16 percent, but expected to rise over the next several quarters.

Sources: Studley; Cushman & Wakefield of Georgia Inc.; Dorey Market Analysis Group

Reach Sams at dsams@bizjournals.com.

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