Buckhead office market leasing bullish in 2012; leads metro Atlanta real estate executives report at forum

With Carter’s Inc. reportedly poised to sign a 200,000-square foot lease in Phipps Tower for the children’s clothing company’s headquarters, Buckhead will post more than 1.1 million square feet of office space absorption since the first of the year. That is growth.

Buckhead is clearly leading the way in the Atlanta office market, which is posting its best absorption rate in more than five years, according to statistics and real estate executives.

Economist David Tutterow at the forum

Optimism over office market growth this year in Atlanta—and especially Buckhead—was the almost unanimous chorus sung by the six panelists at the Oct. 11 Bisnow “Atlanta State of Office” forum at the Ritz-Carlton Hotel in Buckhead.

It also was the message from the forum’s kickoff speaker, Roger Tutterow, professor of economics at the Stetson School of Business & Economics at Mercer University.

Tutterow told the audience of a few hundred real estate professionals that the recovery has been "sluggish," but Atlanta is poised for a strong rebound soon.  "We are a city that is used to outperforming the nation and outperforming it by a significant margin," he said.

Tutterow predicted job creation will get healthier in Atlanta as we head into 2013. "I believe next year we will outperform the nation in terms of job creation," he said, predicting Atlanta would add 40,000 jobs.

The members of the first Bisnow panel on the Atlanta State of Office foum
were, left to right, George Wells, John Barton and David Tennery. 

While the panelists felt good about the office space leasing already taking place, they were quick to point out that continued growth in leasing and development will depend on getting growth in employment and new jobs back to pre-2007 levels.

At the moment, Atlanta’s office market is on pace to absorb almost 3 million square feet this year, according to estimates from Jones Lang LaSalle Inc. That’s the best performance since 2006, when Atlanta posted 2.8 million square feet in absorption. In 2007, it reported 2.1 million square feet.

The second panel of the morning included, left to right, Kurt Hartman,
Drew Barnette and Thad Ellis

So far this year, Atlanta has seen more than 2.5 million square feet of absorption, according to Jones Lang LaSalle. That growth was driven by companies either consolidating regional office space in Atlanta or expanding their existing presence here.

That would be the case with Carter’s Inc. Thursday, Carter’s will move its retail store, IT and financial operations—and about 200 jobs—from Shelton, Conn. to its Atlanta headquarters by the end of 2013. Carter’s was not able to get enough space in Midtown’s Proscenium building, where it presently has its 100,000-square foot headquarters.

David Tennery of Regent Partners

Both the Proscenium and Phipps Tower buildings are owned by Manulife, so the word in the office community is that Carter’s will move north to Buckhead and take 200,000 square feet on eight floors in Phipps Tower, making it one of Buckhead’s largest ever deals valued at more than $70 million over at least a dozen years. 

Also in Buckhead, Boston-based technology services company Sapient Corp. has said it will expand to a full floor at the 3630 Peachtree tower and could add 150 jobs over the next few years.

Buckhead is the best example of Atlanta office markets that have rebounded well from the economic downturn that started in 2007.  Vacancy was almost 30 percent in 2010 after the spec office buildings 3630 Peachtree, Two Alliance Center, Terminus 200 and Phipps Tower were completed. Now Buckhead’s vacancy sits at around 16 percent.

The panels at the Bisnow forum included: David Tennery, principal with Buckhed-based Regent Partners; George Wells, head of asset management for Piedmont Realty Trust; John Barton, senior vice president and managing director of Parkway Properties; Thad Ellis, senior vice president of Cousins; Kurt Hartman, senior vice president of Hines, and Drew Barnette, senior vice president of Eastdil Secured.

George Wells of Piedmont Realty Trust

The panels were moderated by Russell Arouh, partner at Arnall Golden Gregory law firm, and Wes Hudson, office managing principal of the Cohn-Reznick.

“The Buckhead market has had a remarkable comeback and has gained the most attention,” said Wells to kick off the early morning discussion.

Referring to a symbol he knew the Atlanta audience would understand, Tennery said, “The Phoenix is on the rise!” He pointed to 1 million-plus square feet of absorption per year and “a rising rate environment and a real opportunity for value enhancement.”

Tennery said that during the tough times of the past few years, “tenants were looking for concessions but not reduced rates.” He said the rates in Buckhead remained in the $32-$35 per square foot range. “Those concessions are now burning off,” he added.

Tennery added, “This is the healthiest time in net growth absorption…a much deeper recovery in net absorption.” He also recently has seen “some very strong equity partners coming back into the Atlanta market.”

John Barton of Parkway Properties

Wells added that Atlanta and the Southeast markets “do well in capturing relocation tenants.” But he said Atlanta “does better job of capturing corporate headquarters,” citing Crystal restaurants as an example. “The number one reason is the airport,” he said, followed by the “deep talent pool here.” He also included incentives offered and the low cost of doing business in the Atlanta market.

Barton pointed out that 3344 Peachtree is now at 99 percent occupancy and the rates are high. He said tenants “are willing to pay for quality properties. Price is not a factor.”

Barton said all the markets are doing well here with a lot of renewals and expansions, but added, “Buckhead is the first choice.” He specifically cited the technology, data and healthcare companies. 

Wells said Atlanta has been a good alternative to coastal cities, mainly in the northeast. Agreeing with Barton that tenants are willing to pay for quality, Wells added, “Flight to quality will resonate.”

Asked about the major trends the panelists are seeing in office leasing, Wells said the focus is on “how much the tenant can get out of each employee in terms of space,” which he said will have an impact on future absorption.

Thad Ellis of Cousins, left, talks business before the forum.

Barton agreed, saying “there is more and more emphasis on the office-less office, justifying higher end space. That is a trend that concerns me,” he added.

Tennery added, “It is amazing what a tenant can do with 80 square feet of space.”

During the second panel of the morning, Cousins’ Ellis said his company is seeing 90 percent of space growth with existing clients and 3 percent coming from corporate relocations.

Ellis said he does not see any new high-rise office development in Buckhead in the next few years. “Atlanta has not exceeded 50,000 new jobs per year in recent years. Until we have job growth, we are not going to see growth in the office market,” he added.

Drew Barnette of Eastdil Secured

However, Ellis pointed out “it would be a mistake to say Cousins is out of development.” He said 20 percent of the company’s activity will be in development in 2013. “We are still very much a developer, but we have to eliminate 13 percent vacancy and move it to 5 percent” on existing product. He said Buckhead and Midtown are Cousins’ best markets, and Central Perimeter is strong.

Ellis, who was very active in the campaign for the T-SPLOST passage, told the group the “T-SPLOST failure was a big mistake. We should leverage off positives from the T-SPLOST campaign. Let’s not lose momentum in the next couple of years.”

Hartman said that, while the office development market is in neutral, “multi-family allows Hines to play on both sides in the markets where it works with office and retail.”

“Overall, investors look at Atlanta favorably,” Barnette told the audience. “There are challenges within the city we have to fix. Transportation is a major concern,” he added, supporting Ellis’ argument.

“We have to foster a favorable environment for job and business growth,” Barnette added.

Hines Sr. VP Kurt Hartman

Barnette said he is seeing “very favorable pricing and the availability of financing helping with the leasing of office space.” He said insurance companies are very active but are very specific where they want to lend. Banks also have been very active in the Atlanta markets, he added, “especially in unusual deals for them” in past history.

Hartman told the audience not to focus on unemployment figures. “Focus on employment growth,” he said. “Real Estate groups focus on where jobs are being created and the types of jobs.” He also pointed out that employment numbers do not include companies of 20 employees or less and those also lease office space.

“Hines is very bullish over the next five years, including with the Atlanta market,” Hartman concluded.