Take a bow, Atlanta. 2015 was a wonderful year and you did very, very well on many angles, but especially the real estate perspective. In fact, the metro area hit its stride in virtually every property sector from multifamily through industrial and even the once-beleaguered office market. Zippadee doo daa.
So what lies ahead? The positive momentum will continue through ’16 and, even though we are experiencing some level of global instability, the first half of ’17 looks good as well. Put simply, Atlanta’s pot is boiling and it’ll be a good while before China or any other crisis has a direct impact here.
First, a few bullet points from Cushman & Wakefield’s Principal Economist, Ken McCarthy, regarding the national outlook:
- Despite the buffets from global uncertainty, the U.S. economy remains fundamentally sound with GDP growth expected at somewhere between 2.5% and 3.0% in 2016. Consumers are expected to boost spending as wage growth accelerates and the benefits of lower oil prices increase discretionary income.
- Job growth was robust in both 2014 and 2015, and we expect more of the same in 2016. After adding more than 3.1 million jobs in 2014 and an additional 2.6 million in 2015, the U.S. economy is projected to add 2.5 million jobs in 2016. This would make the 2014-16 period the strongest for job growth since 1997-99.
- As the U.S. economy continues to shift toward services, office-using employment is likely to grow even more rapidly. We anticipate an additional 800,000 office-using jobs to be created in 2016.
That, friends, translates into the need for more office space, even with efficiency initiatives.
From my chair as an office tenant representative, I thought I’d highlight a few things I think will impact the Atlanta metro region in 2016.
1) Work is What You Do, Not Where You Are/The Dance of The Millennials – (Workplace Trends – What Tenants Want)
I’ll be the first to say that people (including yours truly) throw the “M” word around like we know everyone in an entire generation. In fact, Millennials are the largest generation alive today, with over 75 million different points of view. But we can make some generalizations about how this impacts the envelope in which we work – our office space.
Another huge factor that will increasingly impact space design is the acute labor shortage in many job types. In short, highly desirable hires can demand certain conditions (like … Gasp! … private offices) and usually get their demands met.
- “Densification” will reach its logical limit. Parking, fire codes and increasingly fussy landlords will draw the line at very heavy users.
- What David Cummings calls “soul-crushing traditional office space” will be replaced by highly corporate-branded and “agile” (flexible) work environments. Layouts may change as often as every few months, and environments will be colorful and bright.
- High-performance workplaces in 2016 will be focused on employee engagement but also provide different areas for heads-down work. Like my friend Bryan Berthold likes to say, I didn’t take away your private office, I gave you a building.
2) Office Hemlines (What Landlords Will Build)
A parallel theme resulting from workplace trends will impact what kind of space developers build and investor create. Make no mistake, there will always be a market for traditional office buildings such as Three Alliance Center, which I predict will have substantial leasing activity in 2016.
However, the historic 91-year-old buildings renovated as Ponce City Market are charging more than the tallest building in the southeastern U.S. – the Bank of America Towers. Remember the building designs of yesteryear? The wavy 80’s and the breadbox 90’s? The early 2000’s consisted of rectangles. 2016 and forward will feel like a village. Highly mobile employees want a sense of community in developments such as Avalon in Alpharetta, Atlantic Station in Midtown or the aforementioned Ponce City Market.
- Lifestyle developments like Avalon and Ponce City Market will continue to be popular
- Cities around the metro will continue to create walkable downtowns similar to Alpharetta and Norcross
- New product such as Three Alliance will see great activity and major leases
3) Money Honey (When Landlords Will Build)
The National Association of Realtors’ quarterly commercial real estate forecast suggests sustained job growth throughout the U.S., and improving credit conditions will work to keep commercial real estate activity expanding into 2016 and beyond.
National office vacancy rates are forecast by Realtors to decrease 0.8% to 14.8% over the coming year, as continued job creation drives demand.
Up through 2016, we saw in Atlanta near-historic restraint on new buildings. Part of this is because of a debt environment more conservative than Ben Carson. Another factor is the changing nature of ownership – national, conservative owners as opposed to entrepreneurial developers. Careful money builds carefully
But even the most conservative banker or politician likes to make money in a low-risk environment. I predict that the horse will be out of the barn in 2016 and that you will see multiple announcements of new office buildings, including some that are 100% spec (with no tenants). Huge rate increases, low vacancy and strong job growth make even REIT and insurance company real estate types smile. As my dad used to say, where there’s smoke, there’s fire.
- We will see 6-8 new office developments actually kick off metro area wide.
4) More HQ on the horizon (Economic Development)
Atlanta had some huge wins in 2015, led by carmaker Mercedes-Benz’ stunning announcement of their HQ move. To even get a serious look from GE for the corporate HQ gives a lot of street cred to the region. Here’s a summary of why our area is one of the hottest on the national site-selector stage:
- 6 million people (and a diverse workforce) can’t be wrong
- 100 million people fly in, around and through the best airport and, yes, busiest. You can get anywhere from here on time and on budget.
- Housing is very affordable and available in every type and flavor
- Getting bored is not an option – museums, shows, and restaurants
- Office space is still a relative bargain compared to most other major U.S. metropolitan areas
- We are at a nexus of post-secondary education – 27 colleges and universities in the greater Atlanta area generate a virtual cornucopia of talent every year.
- We will see 2-3 major headquarters or large corporate projects announce they are moving to our metro in 2016.
5) Movies Are A Blockbuster for Georgia (New Industry)
It all started just a few years back. In 2008, when Georgia Governor Nathan Deal shepherded through a major film tax credit. What a run it’s been, too. 2015 was a blockbuster year for the movie and television business, with almost 250 projects, including productions such as “Ant Man,” Chris Pratt‘s “Passengers,” “The Hunger Games: Mockingjay — Part 2” and “Captain America: Civil War.”
While current studios stayed very busy, more studio announcements were made, including filmmaker Tyler Perry, who got the go-ahead to develop an approximately 330-acre studio on the ground of the former Fort McPherson. Also, the Board of Regents approved a new Georgia Film Academy, which will open on Jan. 11. And, with legislators continuing to support the incentive program, our state can expect more great things in 2016.
A recent report indicates $1.7 billion in direct investment resulted in a total economic impact approaching $6 billion in the state with most of the dollars being in the greater Atlanta Metro.
- All this activity will begin to impact the office market. Payroll services, lawyers, accountants and other support services will lease a cumulative 100,000 square feet in 2016 (500 jobs or so). We will only see this grow in future years.
6) Landlords Get Even More Proud (#CRE Rent Inflation Will Continue)
You know the saying … when you see something expensive, your closet redneck will say “Boy, they sure are proud of that!” In Class A office, asking rental rates were up about 4% year over year.
But that’s only part of the story. Concessions such as free rent and tenant improvement allowances are way down. Oh, and construction costs are way up in part because we are building not one but two billion dollar stadiums at the same time. In suburban markets, we used to see tenants paying $20 a foot and getting a $40 work letter. We now be headed to $40 a foot in rent with a $20 work letter.
- For a few specific submarkets that are in high demand such as Buckhead we will see double digit rate growth. We already witnessed a stunning 12.4% growth in Class A rental rates between 2014 and 2015 in Buckhead
- Rates in most submarkets will reach historic highs.
So hold on for an exciting, if expensive ride. Atlanta, even with the traffic, the future is bright in the world of commercial real estate.