The Changing Face of the Atlanta Office Market
Now that the numbers are in for Q1 of 2017, it's becoming clear that Atlanta office market growth is still tracking closely with national metro office market trends. Office market sectors nationwide are experiencing a development boom that is still struggling to keep pace with strong demand, leading to a 3.5% rent growth increase in Class A buildings for the quarter as average asking rates rise. Class B properties also saw a rent percentage increase, but at 2.6%, growth remains more modest. Along with this development expansion, Q1 net absorption remained positive. Vacancy rates inched upwards this quarter for the first time in several years, however, and with more than 90 million square feet of new space to break ground by 2018, we're likely looking at a gradual balancing of supply and demand by the end of the year.
Trend Drivers: Tech Industry, Millennials
As the Class A vs. Class B property numbers suggest, the story of this healthy office market growth is heavily weighted towards the most desirable new office properties-and the most desirable properties today are driven by tech preferences, as one of our top growth industries. Hip, creative open-office spaces are no longer just the hallmark of Silicon Valley culture; alternative office spaces with open floor plans and holistic, walkable campuses are being adopted more and more by the tech and creative industries nationwide.
More than just tech, the trend is also on the rise for companies looking to attract millennials and younger employees, who tend to prefer loft office spaces with high ceilings, natural light, and open floor plans that encourage collaboration. Another shift here is emphasis on key aspects of building location, with neighborhood desirability, walkability, public transportation access, and nearby conveniences and amenities all ranking high in office property perception at the moment. Younger tech and office workers also seem to prefer locations with fewer chain retail spots and more local flavor, seen by many as a prioritizing of location "authenticity." All of these things work together in the market's slow, gradual shift away from cookie-cutter high rises and office parks to more mixed-use developments. Class A offices are now more often surrounded by diversified businesses, amenities, and housing rather than clustering together in business districts.
Atlanta's Shifting Office Landscape
Creative loft space in Atlanta is still a small portion of the overall office market, but over the past two years its outsize growth has experienced a high absorption rate relative to its size (just 1.9% of the total market). Loft absorption rate was 5.6% of the overall market in 2015, and in 2016 that rose even further to 12.2%, or 7 times the average market share. And, as with the nationwide trend, rents for these office spaces are also on the rise.
The Westside is a core growth area for these types of properties given its connection to Beltline amenities, with a wide mix of restaurants and retail. Proximity to Georgia Tech also plays a role for tech industries in particular. The Westside has a low office vacancy of around 7.5% in the Class A segment, though many new developments are underway, including T3 at Atlantic Station, the Stockyards, and Star Metal Lofts.
Not to be outdone, the Eastside is quickly growing hotspots of its own as one of the fastest-growing areas of Atlanta. Growth has largely concentrated around the Memorial Drive corridor with the success of Ponce City Market, a popular mixed-use development. Q1 rent hit $53/SF for these office properties. The Beltline's Eastside Trail is set to get a makeover of its own after a deal for nearly two-acres was made for an $80 million multi-use development that's set to include apartments, highly-anticipated restaurants, and street-level retail.
Overall, traditional office tower properties won't be disappearing any time soon, but the outsize growth in and clear preference for more community-integrated offices is harbinger of a shift in the Atlanta office market that's well on its way to changing the city landscape.