By Ken Ashley, Executive Director, Office Tenant Representation
2017 was a mighty fine year for Atlanta office real estate. Macro events such as tax law changes, a roaring stock market, very healthy corporate profits and strong employment numbers helped corporate America have a pep in its collective step, and Atlanta was no exception.
As I look deeply into my crystal ball and based on reading and conversations with economists and market experts, I’ve begun to tune up some predictions for 2018 in seven areas:
The goal in 2018 for corporate America is employee engagement. Read another way, employers want you to want to come to the office. On the development side, this is dramatically impacting what architects are drawing and where building is occurring. Infill development will continue to thrive. Buildings will continue to strive to look “authentic,” like Hines’ T3 development, which will consist of a 200,000-square-foot, heavy-timber-frame and wood building planned at Atlantic Station. Authentic design can be achieved using the right materials or by retrofitting an older building – the organic approach to real estate.
The Emergence of the City Center
Maybe the 1950s are coming back to life in reimagined small town America. Seven city center projects are proposed or under construction around metro Atlanta, including the Braves Stadium know as The Battery, Avalon in Alpharetta, City Springs in the City of Sandy Springs, Assembly in Doraville and others. People like working in a dense environment, but want to enjoy the cheaper housing and larger yards of the suburbs. Some have said the city center concept is the 21st century mall.
Next year, rental rates on most classes will stop climbing as fast as they did in 2017, and concessions start to return in certain markets like Central Perimeter. I also believe there will be an uptick of subleases as growing companies are forced to move their operations in order to expand. There was an increase towards the end of 2017, and we believe there will be even more of this activity in 2018. The one exception to this forecast is newly delivered Class A, which is the hottest product in our city. Corporations with a pocket book will continue to drive rates in sexy new product to the highest our town has ever seen.
Office Product Types
As always, the market will continue to be a tale of the haves and the have nots. Rental rates notwithstanding, the haves will remain the most popular among tenants that can afford them and investors who pine for the latest and greatest. Take Three Alliance for example. The building experienced a rapid lease-up and has now traded for a historic price. Class B product with inefficient floorplates and lack of support amenities won’t experience near the rental rates of trophy Class A. Expect to see a trophy tower launch in an urban market with much more infill urban development/redevelopment. Finally, urban industrial product is becoming more attractive for redevelopment into creative loft office.
Last year, corporate America was catching its breath and approaching with caution because of uncertainty around the administration, tax policy and the general business environment. However, with the Dow is up 5,000 points in one year, which has never happened in history, and the business economy is, and will remain, robust. I believe there will be continued organic growth and M&A activity in 2018. In board meetings and planning meetings, which are taking place right now, I believe businesses are planning for expansion in 2018. In 2017, many companies were a question mark, and that has turned into an exclamation point for 2018.
In 2018, we anticipate cap rates will remain steady for suburban product. In the suburbs, there were misalligned expectations between sellers and buyers. Sellers forecasted continued rental rate increases, but buyers didn’t agree. One can anticipate further cap rate compression in high-rise urban and “cool” infill product – where she stops, nobody knows.
Next year will also be the year that the “internet of things” (IOT) begins to have a real impact on commercial real estate. It will rapidly improve the operating efficiency of commercial real estate, and it will be interesting to see what sort of role it will play for building owners and managers, as well as tenants. Building systems will let us know when they need service and save on labor cost. Maybe they’ll bring you coffee at 2 p.m., too.
I saw a beautiful sentence in the Wall Street Journal recently: “Investors have abandoned defensive positions, throwing caution to the wind.” As you complete returning all those gifts back to Amazon, let’s hope Santa is in a good mood all year in 2018. This economy is the gift that keeps on giving.
Let’s keep this ball rolling, shall we?