Atlanta’s office market finished 2017 on a strong note with positive fundamentals forecasting continued growth in 2018. The vacancy rate decreased over the quarter, from 17.3% to 16.9%, but was up from last year’s rate of 16.6% because of the delivery of unoccupied new space.

The overall asking rental rate continued to climb, reaching $25.48/SF by the end of 2017. This was up 1.4% from the average of $25.13/SF last quarter and up 7.4% from $23.73/SF one year ago. Overall, the asking rents in Atlanta’s office market have risen 26.0% from their 10-year low in first-quarter 2013.

Net absorption for the quarter was 860,024 square feet, bringing the year-to-date total to 972,671 square feet. While a strong metric for most markets, this was the lowest annual total absorption in six years.

Overall asking rents have risen 26.0% from their 10-year low.

Since the expansion began in 2013, Atlanta has seen almost 9.0 million square feet of space absorbed. With only 3.5 million square feet of new inventory added during this period, the market’s vacancy plummeted from its peak of 22.6% in 2012 to 16.9%.

Class A Market Strong

Overall, Atlanta’s Class A inventory finished the year with a vacancy rate of 15.2%, higher than the level one year ago but unchanged from that of 2015. It is expected to decline over the next 12to 24 months, as tenants move into the newly delivered buildings. Net absorption was over 1.0 million square feet for the seventh consecutive year. The average asking rent rose 6.0% from year-end 2016 to $28.37/SF, the fourth consecutive annual growth to exceed 4.5%, as high tenant demand surpassed the amount of space available.

Urban, “24/7” environments remain the most interesting to tenants looking to attract and retain their workforce, as indicated by a resurgence in demand in Atlanta’s urban core submarkets of Buckhead, Midtown and Downtown. This cluster has seen consistent leasing activity, as the vacancy rate was 14.9% at the end of 2017, just 10 basis points above the rate from one year ago. Rent growth surpassed that seen in the market as a whole, growing 10.8% over the 2016 average of $28.49/SF to $31.58/SF.

Leasing Activity Forecasting Continued Growth

Large leases signed during the fourth quarter signify growth in 2018, as only 29.6% were renewals in place. One quarter of the deals were expansions, which will benefit the market once they commence. Several of the relocations signed during the quarter also included expansion components. The largest of these expansions was a 55,000-square-foot lease signed by a Cox Communications subsidiary in Central Perimeter.

Four of the five largest deals signed this quarter will help lower the vacancy rate and drive net absorption in 2018.

Build-to-Suits Account for Half of Development Pipeline

Recent development of large high-rise buildings has consisted of build-to-suit projects, with very few buildings built on a speculative basis. The tenants taking these towers include NCR, Mercedes-Benz USA, State Farm and Comcast. The average size of the properties under construction has fallen since the beginning of 2015, a result of the increase in the number of smaller, older industrial warehouses converted to loft office space. The average size of the nine properties under construction at the end of 2017 was 365,321 square feet, down 34.1% from the average three years ago.

Four of the properties currently under development are for corporate or regional headquarters operations. These properties account for 1.6 million square feet, almost 50.0% of the current pipeline. Overall, the properties under construction are 65.0% pre-leased, indicating there may be very isolated periods of excess supply.

The average size of properties under construction has fallen since 2015.

Market Outlook

The next two years are expected to mirror 2017, with periods of growth spurred by tenants opening new operations within the market and region. Vacancy is not projected to grow significantly, as speculative construction has been isolated, which has allowed the absorption of top-quality space to continue throughout the region. Companies needing larger spaces will need to plan for their real estate needs earlier than they have in the past. Increased demand for space in the traditional submarkets will drive tenants to become more creative with their space layout or consider moving. Landlords will need to ensure their available space and building amenities meet current tenant needs.

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