Atlanta's vacant office space could take years to fill

By Gertha Coffee

The Atlanta Journal-Constitution

Atlanta is so swamped with vacant office space that it could take a dozen years to fill it all – and that’s if the metro area returns to the robust growth it had before the recession.

The glut of commercial space -- most apparent in Buckhead with more than 3 million square feet of empty space -- raises challenges to any thoughts of constructing new towers in metro Atlanta for years to come.  It also underlines the difficulties building owners and managers face snagging tenants in a market with far more supply than demand.

Overall, the metro Atlanta office market has 24 million square feet of vacant office space. The absorption rate -- move-ins vs. move-outs -- showed 59,000 square feet of negative absorption in the third quarter of 2009, according to a report by Richard Bowers & Co. It was the fourth consecutive quarter of negative absorption and the second longest period of negative absorption since the company started tracking the Atlanta office market quarterly in 1987.

How bad is that? If the market improved so that 500,000 square feet of space was being filled quarterly, it would take 12 years to fill all the empty space.

“That’s not really going to happen,” said Jonathan Majors, director of research for Bowers.

In good times, typically 300,000 to 700,000 square feet of space is absorbed quarterly, he said. “Two years ago, we were saying the market would turn around in 2010,” he said. “Now we’re not saying that.”

In fact, he said, “I’m not sure what to expect in the fourth quarter.”

In the last two to three years, 50,000 office workers have lost their jobs, the report pointed out, as companies have downsized or gone out of business. If those workers had not lost their jobs, the Atlanta office market would likely be in excess of 90 percent occupancy, a healthy rate.

As it stands, metro Atlanta’s office vacancy rate for the third quarter was 18.1 percent, up from 15.7 percent for the same period in 2008, according to the Bowers report.

Nationally, office vacancies rose another half point during the third quarter, to 16 percent, according to the third quarter office report from global real estate services firm Colliers International. As with the previous quarter, office vacancies rose in both downtown and suburban markets, although suburban markets were more lackluster, the report said.

In metro Atlanta, Colliers put the downtown vacancy rate at 13.6 percent for the quarter, up 1 percent from the third quarter of 2008. The suburban market vacancy rate stood at 17.4 percent, up from 15.3 percent for the same year ago period.

Due to the weak economy, only three office buildings are under construction in metro Atlanta. All are scheduled to be completed in 2010: two in Buckhead, 3630 Peachtree and Phipps Tower; and 12^th & Midtown in Midtown. Only 12th and Midtown has signed leases -- with two tenants for 121,000 square feet of the 725,000 square foot office tower.

With vacancies yet to peak and rents continuing to decline, it is doubtful the Atlanta office market will see any major construction for a few years, analysts say.

Atlanta's construction cycle is typically four to seven years, so with a very healthy rebound from this downturn, construction could begin again as early as 2012, said Lanie Rea, research manager for Jones Lang LaSalle in Atlanta.

The next major Class A office construction will likely be a build-to-suit project, she said, or one in which a major tenant has committed to significant space prior to breaking ground.

Access to the financial markets is nearly frozen as lenders and developers find themselves under siege for too many bad loans related to real estate.

For example, American United Bank in Lawrenceville failed last week amid huge real estate losses. American United was the 25^th Georgia bank to fail since August 2008, the most in any state during that period.

Earlier this week, Capmark Financial Group, the lender tied to the Equitable Building in downtown Atlanta — the city's first significant commercial foreclosure — filed for bankruptcy.

Office foreclosures are expected to continue across metro Atlanta as developers struggle to reach agreements with lenders that will allow them to restructure debt.

A lack of construction will help the office market rebound, Rea said.

"With low demand, any new space that delivers would likely deliver vacancy," she said. "A lull in construction for the next several years will be a positive thing for the market."