Exciting change is happening in the Buckhead real estate market. After three to four years of stagnancy, new office buildings are springing up all over the area. Tenants can take advantage of fantastic opportunities if they seize the moment.
“Four new office buildings are coming out of the ground, and there is talk of two more, as well,” says Bill Kilborn, Senior Vice President, Tenant Representative Group, CB Richard Ellis in Atlanta. “Everyone is trying to figure out where the demand will come from to fill these new properties.”
Smart Business looked to Kilborn for an analysis of the developments in the Buckhead market and how tenants can use them to their advantage.
What market forces are driving this new construction?
Cousins Properties Inc. recently opened up Terminus 100 at 95 percent occupancy. I think other developers saw the success of Terminus 100 and felt like they could benefit from opening new office space, as well. Landlords have been escalating renters’ rates for existing properties. If developers can lease out their new buildings at these high rates, they will clearly profit.
What uncertainties does this create in the marketplace?
Many of us who represent tenants are trying to determine whether enough market demand exists to fill these new buildings under construction. Some of the questions on our minds right now include:
- Can the Buckhead market absorb close to 2 million square feet of new inventory?
- Is the demand going to come from companies’ growth?
- Has the area had positive absorption or are tenants just moving, and sometimes downsizing, from a Class B building to a newer Class A building?
What do you believe is the most likely outcome in this situation?
I think the new buildings will get leased out, but I think that demand will come at the expense of properties older than 10 years old. By my best estimate, I foresee a shift from Class B buildings to Class A buildings. Tenants probably won’t need expansion space, but will relocate because they can enjoy a more attractive space without incurring a huge rental rate increase.
What could happen to the Class B buildings?
I believe owners of Class B buildings will face some difficulties as they experience huge vacancies caused by increased real estate market supply. Investors have bought and sold many of the properties in the past five years at a very high cost per square foot. The current owners purchased the buildings at high rates, which means they then have to elevate rental rates to get their desired return.
Also, tenants must keep in mind that they will experience substantial tax increases in their present spaces in the next two to three years. These tax hikes will also directly affect their rental rates. After buildings sell at elevated prices, the government comes in and values them at much higher levels. This causes the property taxes to go up significantly and the landlords pass these taxes on to the tenants. As tenants evaluate their options at lease renewal time, they will have to consider not only their current rates but also the multiple increases to the total cost of occupancy in the coming years.
On the other hand, some of the developers receive tax incentives to construct new property. This leads to a substantial tax rate differential between old and new office space, which could allow tenants to experience significant savings. This situation will make it challenging for older properties to compete with the comparable rental rates on newly constructed buildings.
How should tenants respond to these new developments?
The expansion of office space in the market offers a great opportunity for tenants in and around Buckhead. Businesses should consider the possibility of moving to a newer, more efficient building, if their lease expires in the next two to three years. Relocation could offer them many advantages without incurring excessive rental rate increases.
Even if companies’ leases don’t expire in 2008 or 2010, real estate decision-makers should still take a close look at their present leasehold position. A key question to answer is whether they have the opportunity to become an anchor tenant or a solid tenant in a building currently under construction. Competing for prime space in early phases gives tenants the opportunity to plan and to achieve great preleasing rental rates.
How can tenant representatives facilitate this process?
Experienced tenant representatives constantly have their eye on the market, which makes them acutely aware of strategic opportunities. They can complete tenant lease abstracts and clearly explain what’s happening in the Buckhead market. Using this information, clients and tenant representatives can determine the response that will maximize the advantages for tenants. This could include relocating to newer, more efficient spaces at similar rental rates.
BILL KILBORN is Senior Vice President in the Tenant Representative Group with CB Richard Ellis in Atlanta. Reach him at (404) 504-7904 or email@example.com.