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 protected].
