Office space bubble? Not this time

The words “Atlanta” and “discipline” are seldom spoken in the same sentence when it comes to development.

When it comes to the building of new speculative office skyscrapers, however, the Atlanta area of late has almost been a model of restraint.

The region is at a post-recession peak in office construction, and a number of projects in their early stages have been pitched. But the amount being built is rather slim for an area prone to over-development, experts say.

Some of that stems from the hangover lenders and developers still feel from the financial crisis, which left several new see-through office towers hovering over Buckhead and Midtown.

Another factor is the high cost of construction, coupled with rents that aren’t yet high enough in many metro Atlanta neighborhoods to entice lenders to put up the dough for spec space.

As a result, overall office vacancy narrowed in the first quarter to 17.2 percent, according to data from real estate services firm JLL.

Chris Ahrenkiel, managing director in Atlanta for real estate giant Tishman Speyer, said the market is tight as it has been in about 15 years. That’s good news for Tishman Speyer, developer of Three Alliance Center, Buckhead’s lone speculative office tower near Lenox Square.

Metro Atlanta office rents also reached an all-time high in the third quarter of last year, according to a report at the time by CBRE Research, and have only marched upward.

“The knock in the Sunbelt has traditionally read something like this: As soon as the rents start to increase, new supply quickly emerges and overwhelms demand. End of cycle,” said Gregg Adzema, chief financial officer of Cousins Properties said in the company’s first quarter conference call with investors.

“But that hasn’t played out this time,” he said. “Although it varies by market, current construction as a percentage of office inventory in our markets is remarkably low.”

Plenty of “build-to-suit” office construction is happening for corporate campuses owned or controlled by the main tenant, such as State Farm in Dunwoody, Mercedes-Benz in Sandy Springs and NCR in Midtown.

Speculative projects underway — including the Three Alliance Center tower in Buckhead, two mid-rise buildings in the Cumberland Mall area, one at Avalon in Alpharetta and another in Brookhaven at Perimeter Summit — may be small historically but represent the most since the crash.

Tight space

Still, as space tightens there are very few large blocks of space for companies that want to move into new digs or for firms expanding or moving into the metro area.

Chris White, Atlanta market leader and executive vice president for real estate services firm Savills Studley, said new leases dipped in the first quarter amid turbulence in the global economy. But demand remains strong. The region filled 325,000 square feet of empty space from January-March, according to JLL.

The new space will relieve pressure, but the prices for tenants will be higher, he said.

“You didn’t have to focus as much on the cost of Atlanta real estate as you will going forward,” White said.

White, whose firm represents tenants, said four to eight major law firms could look for new space in the next few years. Many law firms will try to put more people in less space — a trend throughout the business world — and with space so tight, their searches could lead to more new construction.

Ahrenkiel said his firm is seeing interest from finance, law and financial technology firms among others. Some are existing Atlanta companies looking to refresh their space, and others are potential headquarters relocations.

Atlanta-based developer Portman is preparing to start a 21-story Midtown tower called Coda. Part of Technology Square, it will be anchored by Georgia Tech and could feature the highest monthly rents Atlanta has ever seen, perhaps in the $40-$50 per square foot range. About half of the office space in that tower will be leased to private companies.

Metro Atlanta’s spec office development, however, pales in comparison to what has been seen in cities such as Houston, which has seen a number of flashy new towers open even as the oil price crash roiled the regional economy.

Larry Gellerstedt, president and CEO of Atlanta-based Cousins, said in an interview last month that he sees the development cycle being in its sixth or seventh inning.

Economic cycles

That’s less a commentary on metro Atlanta’s economy, which added about 77,000 jobs in the past 12 months, than on the arc of economic cycles. The U.S. has been in an expansion since late 2009. The average economic expansion since World War II has lasted 58.4 months, or about five years, according to the National Bureau of Economic Research.

Cousins recently announced plans to merge operations with fellow real estate investment trust Parkway Properties in an estimated $2 billion deal that would make Cousins the biggest owner of trophy office buildings in Buckhead and Midtown.

As part of that deal, Cousins and Parkway will put Houston office buildings into a separate spinoff company.

Though Gellerstedt said he doesn’t foresee a major real estate collapse like the one Atlanta experienced after the financial crisis, he said his firm might sell some Atlanta buildings to raise cash and be ready to catch the wave.

Meanwhile, Cousins is building NCR’s headquarters, and the Atlanta firm and Houston-based real estate developer and services firm Hines recently kicked off 8000 Avalon Boulevard in Alpharetta’s bustling Avalon mini-city.

No committed tenants have been announced, but the more than 200,000-square-foot, mid-rise building is seeing interest from high-tech firms, said John Heagy, market chief for Hines in Atlanta. There’s also room at Avalon for a second office tower.

Separately, Hines has three mid-rise office buildings on the drawing board at Atlantic Station in Midtown. He said his team is tracking some 2 million square feet of office space demand just in the Midtown area.

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