Rates set to rocket in second-tier submarkets

July 4, 2008

Atlanta Business Chronicle
by Tom Barry Contributing Writer

Higher construction costs are bringing Buckhead-type office rates to the Northwest submarket, raising the question of what levels are attainable in a still-sluggish office environment.

Seven Oaks Company LLC and GE Asset Management Inc. are eyeing $31 per-square-foot rates for their new 16-story, 350,000-square-foot, $100 million office tower at U.S. 41 and Cumberland Parkway.

Shailendra Group LLC, meanwhile, is developing an eight-story, 206,000-square-foot office building at 2555 Cumberland Parkway, in the Cumberland/Vinings area. Anticipated rates for the $30 million to $35 million structure are in the $28 range.

By contrast, class A rents in the Northwest submarket averaged $22.01 in first-quarter 2008, according to CoStar Group Inc.

“Construction costs are a lot higher today, plus new buildings have better amenities and floor plates that are more efficient,” said John Robbins, senior vice president for the Shailendra Group.

Many factors go into setting office rates, from land and construction costs to projected return on equity to market conditions to the structure of the investment group.

“Buildings have to deliver a return to their investors and to the developer, but you also have to compete in the market to fill your building with tenants,” said Rob Metcalf, managing director of tenant representation for Jones Lang LaSalle Inc.

Projected pricing for the two new buildings “sets a new high-water mark for the Cumberland-Galleria submarket,” said Joe Terrell, executive vice president of Carter. “What differentiates that submarket from Buckhead is that you have to pay for parking on top of that in Buckhead. Add parking and you’re [effectively] paying [top rates] of $35 or $36 in Buckhead.”

Rental rates across metro Atlanta continue to climb. Quoted rates for class A space averaged $23.39 in first-quarter 2008, compared with $21.67 a year earlier, CoStar reported. Eight of the 10 submarkets experienced rate increases.

Perennial leader Buckhead had the highest average rates ($28.29) among the eight submarkets with more than 10 class A office buildings, followed by Midtown ($24.58), Central Perimeter ($23.76), Northwest ($22.01), Northlake ($21.05), Northeast ($20.84), North Fulton ($20.48) and downtown ($19.96).

Bob Mathews, president of Colliers Spectrum Cauble Inc., said soaring construction costs are driving higher rates for new properties.

“There’s been very little new construction in the Cumberland-Galleria submarket in the last three or four years, so there isn’t as much vacant space now as there was back then,” Terrell said.

Shailendra plans to break ground on its project — at Paces Ferry Road and Interstate 285 — in the third quarter, with an anticipated late 2009 delivery.

Rents will be in the $28 to $30 range — “$28 for the initial deals that kick off the project, and then we’ll move up accordingly, if we can,” said Robbins, adding that roughly a 10 percent return is projected for the property.

To determine rates, “we use some pretty complex modeling that takes into account [such factors as] the time value of the money, how long the development period will be and the anticipated lease-up for the project,” he said.

Seven Oaks CEO Bob Voyles also cited rising costs for the higher rates. Voyles said Riverwood 200 — part of the Riverwood mixed-use development — will cost about $275 per square foot to build.

“Land pricing has stayed pretty much the same, but construction costs along I-285 have gone up almost $100 a square foot in seven years,” Voyles said. “When we were at Hines, my partner and I developed two buildings at Perimeter Summit in 2002 and 2003. The first cost $175 a square foot, the second $185.”

Higher construction costs, in turn, “ratchet through other parts of your pro forma,” Voyles said.

Riverwood 200 will be part of the mixed-use Riverwood development, to include 335 residential units, 85,000 square feet of retail space — with five restaurants in the mix — and a 200-room hotel. Groundbreaking on the office building is expected later this summer, with completion targeted for late fall 2009. Another office tower — Riverwood 300 — is on the drawing board. Combined, the two new towers will have about 700,000 square feet of office space.

Terrell expressed skepticism about the higher rates for the new buildings, although he noted that delivery won’t be until late 2009 or early 2010.

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