Office Research

Market Report Second Quarter 2018

Atlanta Metro Area

Vacancy Improves in CBD Space as

Suburban Completions Surge Office 2018 Outlook

Rising office construction edges up vacancy in suburban 2.9 million sq. ft. Construction:
Atlanta. Employment growth above the national average has Office completions reach the
will be completed
underpinned healthy office demand the past five years, plummeting highest level since 2009. Last
vacancy nearly 400 basis points since 2011. The declining rate year, more than 2.7 million
has generated an uptick in construction as tenants seek quality square feet of space was
space and deliveries may peak this year. The elevated pace of delivered metrowide.
completions has begun to weigh on metrowide vacancy, primarily
in the suburbs, which received the bulk of space during the past 40 basis point Vacancy:
two years. While suburban vacancy has lifted, strong demand in Net absorption of 1.5 million
increase in vacancy
the central business district has slashed vacancy, particularly in square feet will not outpace
Downtown. No new office space has been built in the area during completions, lifting vacancy to
the past four years and strong demand has plummeted vacancy 16.5 percent. In 2017, vacancy
and generated above-metro-average rent gains. rose 80 basis points.

Deliveries shift to the central business district. While 3.4% increase Rents:
completions remain elevated in the suburbs, construction Strong rent growth in several
in asking rents
begins to shift to CBD areas. More than 2 million square feet is select submarkets aids in an
underway in Midtown and Downtown Atlanta, with completion overall 3.4 percent increase to
dates scheduled through 2019. Much of the deliveries are build- the average asking rent, reaching
to-suit including 762,000 square feet for the NCR Corporation $24.35 per square foot this year.
Headquartes. Metrowide, roughly 1 million square feet is
speculative construction, less than 1 percent of total inventory.

Investment Trends
Local Office Yield Trends • Corporate growth continues to drive job creation in Atlanta,
Office Cap Rate 10-Year Treasury Rate keeping investors interested in the metro’s office assets. Out-
of-state buyers are increasingly competing with local investors,
12% with many targeting properties that have higher first-year returns
than those available in their home markets. Metrowide, office
9% properties trade with average returns in the mid-7 percent band.
Rate

6% • Steady demand and strong rent growth have increased investor

interest in office properties in Downtown Atlanta. Sales picked
3% up notably in the area with buyers targeting many of the assets
located along Peachtree Street. First-year returns for properties
0%
00 02 04 06 08 10 12 14 16 18* here averaged in the mid-5 percent area.
• Outside of the perimeter, buyers in the $1 million to $10 million
price tranche remain active in Roswell up to Alpharetta. Here,
cap rates up to 50 basis points higher than the metro average
can be found.

* Cap rates trailing 12 months through 1Q18; 10-Year Treasury up to March 29

Sources: CoStar Group, Inc.; Real Capital Analytics
Atlanta
1Q18 - 12-MONTH TREND
Employment Trends EMPLOYMENT:

6%
Non-Farm Office-Using
1.6% increase in total employment Y-O-Y
Year-over-Year Change

• More than 11,000 employees were added to staffs during

3%
the first quarter, contributing to a year-over-year total of
44,700 positions.
0%
• The pace of hiring cut the metrowide unemployment rate
-3% 60 basis points during the past 12 months to 4.2 percent
in March. The rate is slightly above the national average
-6%
of 4.1 percent.
08 09 10 11 12 13 14 15 16 17 18*

Office Completions CONSTRUCTION:

Completions Absorption
5,000
4 million square feet completed Y-O-Y
Square Feet (thousands)

• During the past four quarters, nearly 4 million square

2,500 feet of office space was completed, up from 1.5 million
square feet delivered the previous year.
0
• An additional 4 million square feet is underway metrowide,
-2,500 with completion dates scheduled through 2020. About
580,000 square feet is medical office space.
-5,000
08 09 10 11 12 13 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

Metro United States
50 basis point increase in vacancy Y-O-Y
22%
• The elevated pace of completions during the past 12
19% months considerably outpaced demand, lifting vacancy
Vacancy Rate

50 basis points to 16.3 percent.

16%
• Despite the rate rising metrowide, office vacancy in the
13%
CBD fell 60 basis points to 13.5 percent during this same
time. Healthy demand aided in a 7.3 percent increase in
10% asking rent in the area to $28.77 per square foot.
08 09 10 11 12 13 14 15 16 17 18*

Asking Rent Trends RENTS:

Metro United States 5.2% increase in the average asking rent Y-O-Y
8%
Year-over-Year Change

• Building on last year’s 4.5 percent increase, the average

4% asking rent climbed 5.2 percent to $24.08 per square foot
in March.
0%
• In Downtown Atlanta, strong demand plummeted
-4% vacancy and pushed the average asking rent up 9.9
percent to $23.68 per square foot. Vacancy in the area is
-8% one of the lowest metrowide.
08 09 10 11 12 13 14 15 16 17 18*

* Forecast
 Office Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

2018 FORECAST JOB GROWTH *POPULATION AGE 20-34 **SQ. FT. PER OFFICE WORKER

Metro 1.7% Metro 21% Metro 291

U.S. Average 1.2% U.S. Average 21% U.S. Average 213

**OFFICE SQUARE FOOTAGE

31% Urban
2018 OFFICE-USING JOB GROWTH POPULATION OF AGE 25+ U.S. Average 32%
*PERCENT WITH BACHELOR DEGREE+
Metro 0.5% 69% Suburban
U.S. Average 2.2% Metro 36% U.S. Average 68%

U.S. Average 29% * 2017

**1Q18

Lowest Vacancy Rates 1Q18 Sales of Medical Office Buildings Jump,

Elevating Property Values
Y-O-Y
Vacancy Asking Y-O-Y %
Submarket
Rate
Basis Point
Rent Change • Transaction velocity for Atlanta’s office assets picked
Change
up 4 percent during the past four quarters. Increased
bidding lifted the average price up 13 percent to $167
per square foot.
SUBMARKET TRENDS

Midtown Atlanta 12.2% 140 $33.21 10.2%

• The number of medical office buildings traded doubled
during this same time. Heightened competition lifted
Downtown Atlanta 12.7% -220 $23.68 9.9%
SALES TRENDS

property values considerably to $255 per square foot.

Northlake 12.8% -10 $19.87 8.6% Outlook: The elevated pace of construction during the past
12 months may provide investors with some additional
South Atlanta 13.9% 70 $18.03 5.4%
opportunities at the top end of the market. Newer assets
Buckhead 16.1% -30 $31.85 0.7%
change hands with returns in the low-6 percent band.

North Fulton 16.4% 120 $23.27 4.1%

Price Per Square Foot Trends
Northwest Atlanta 18.3% 180 $22.87 5.9%
Year-over-Year Appreciation

36%
Central Perimeter 19.3% 70 $27.62 1.9%

18%
West Atlanta 19.7% 50 $17.46 -14.6%

0%
Northeast Atlanta 21.5% 60 $17.57 1.4%

-18%
Overall Metro 16.3% 50 $24.08 5.2%

-36%
08 09 10 11 12 13 14 15 16 17 18*

* Trailing 12 months through 1Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Office Research | Market Report

1Q18 Office Acquisitions By WILLIAM E. HUGHES, Senior Vice President,

By Buyer Type Marcus & Millichap Capital Corporation
Other, 1% • Fed raises benchmark interest rate, plots path for additional
Cross-Border, 8%
increases. The Federal Reserve increased the federal funds rate
by 25 basis points, lifting the overnight lending rate to 1.75 percent.
The Fed noted that inflation has broadly reached its objective, while
Private, 62% the domestic economy is performing tremendously well as tax cuts
Equity Fund power household spending and corporate investment. As a result,
& Institutions, 24%
the Fed has guided toward two additional rate hikes this year, likely
in September and December, while setting the stage for as many
Listed/REITs, 5% as four increases in 2019.

CAPITAL MARKETS
• Lending costs rise alongside Fed rate increase. As the Fed
Office Mortgage Originations continues to lift interest rates, lenders are increasingly tightening
By Lender margins in order to compete for loan demand. Despite these
100% efforts, borrowing costs remain on an upward trajectory, which may
prompt investors to seek higher cap rates or pursue greater returns
Percent of Dollar Volume

75% Nat'l Bank/Int'l Bank in secondary markets. However, robust economic growth and
CMBS rising net operating incomes are keeping selling prices elevated,
Financial/Insurance which may widen an expectation gap as property performance and
50%
Reg'l/Local Bank
Pvt/Other demand trends remain positive.
25%
• Lending continues to be highly competitive. While the Fed
has committed to tightening policy, global markets and foreign
0%
12 13 14 15 16 17
central banks are keeping pressure down on long-term interest
rates, restraining the 10-year Treasury to the 3 percent range.
Banks, commercial mortgage-backed securities (CMBS) and life
Include sales $2.5 million and greater insurance companies are providing debt for office assets, with
Sources: CoStar Group, Inc.; Real Capital Analytics leverage at banks typically capped at 65 percent. Meanwhile, life
insurance companies will typically provide capital with leverage
between 60 and 65 percent, with CMBS offering up to 70 percent.
Lender spreads have narrowed in recent months, while 10-year
loan structures will typically range between 4.25 and 5.25 percent,
depending on tenancy, location, sponsorship and loan-to-value
ratio. Minimum debt service coverage required is 1.3 times expected
asset revenues, supporting debt yields of 8.5 percent. The national
economy should grow strong and office demand should support a
10-basis-point decline in vacancy to 13.7 percent nationally.
National Office and Industrial Properties Group

Alan L. Pontius
Senior Vice President, National Director | Specialty Divisions Atlanta Office:
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com
Michael Fasano First Vice President/Regional Manager
1100 Abernathy Road N.E., Bldg. 500, Suite 600
Prepared and edited by Atlanta, GA 30328
Catherine Zelkowski (678) 808-2700 | michael.fasano@marcusmillichap.com
Research Analyst | Research Services

For information on national office trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment
growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline;
U.S. Census Bureau