At the eleven-month mark of 2021, a couple of property types in the Atlanta commercial real estate market, Office and Hospitality, are continuing to underperform as a result of the Covid-19 pandemic. On the other hand, demand for well-located land continues to be extremely strong. The following will address each segment and their outlook.
According to CoStar, the Atlanta Office Market contains some 331 million square feet of office space. The current vacancy rate is 13.9% and over the past year, the absorption rate was a negative 2.2 million square feet. Year over year rent rate growth is a paltry 1.2%. The Covid-19 pandemic shutdown that began in late March 2020 emptied out office buildings overnight and accelerated the trend of “work from home.” Since the beginning of the pandemic, “return to the office” dates have been announced by companies on a regular basis only to be extended until some future date — the latest being “after the first of year-2022.” As a result, many companies are subletting excess office space and/or reducing their space needs when a lease comes up for renewal.
Commercial real estate thought leaders foresee that post-pandemic, the average worker will be in the office only three days a week and “hoteling” or reserving desk space will be the norm. Some experts have declared the end of the open floorplan office and project the post-pandemic office will occupy the same amount of space and be more spread out. Other thought leaders envision the rebirth of the suburban office as workers as those who, if they must be in the office, want to avoid traffic and be closer to home. If there is an excess of vacant office space, some of those buildings, especially older properties, may be converted to multifamily apartments or condominiums. I expect that over the next year or so some of these ideas may manifest themselves. Of course, this assumes that the pandemic abates in 2022.
There are 109,154 rooms in Atlanta’s Hospitality Market according to CoStar. The occupancy rate is 56.9% and the average daily rate is $94.01. Hotels and motels in Atlanta attract both business/conventions customers as well as leisure travelers. The hospitality market was affected particularly hard by pandemic restrictions with conventions being cancelled and Zoom meetings taking the place of face-to-face business meetings. I expect that the convention business will begin to return next year. Business travel will also return, and it is anyone’s guess as to if it will approach pre-Covid-19 levels or companies will continue to rely on Zoom and other computer-based tools to reduce meeting related travel expenses. Because the State of Georgia relaxed many pandemic restrictions, leisure travel has returned to close to pre-pandemic levels. CoStar reports that 2,300 new rooms came on the market this year and that there are over 5,000 additional rooms in the pipeline. My prediction is that some underperforming properties will be converted to multifamily residential use as a way of repurposing existing properties and supplying the affordable housing market with additional inventory.
The Atlanta Land Market covers a 13-county region in North Georgia. I am going to focus on two submarkets in the City of Atlanta, Downtown and Midtown. The Downtown market includes areas around Centennial Olympic Park, the Railroad Gulch (Centennial Yards), Summerhill, the Memorial Drive/DeKalb Avenue corridor and the Eastside Beltline. The Average Sales Price in this submarket is $6.3 million or $44 per square foot according to CoStar. The average transaction had about 130,000 square feet and the total sales volume for the area in the last year was $100 million. Much of the activity in the Downtown market is driven by the Atlanta Beltline, the Georgia State University Summerhill project and land for dorms on the north side of the GSU campus.
The Midtown market includes the area around Georgia Tech, Atlantic Station, the Peachtree corridor and the Ponce de Leon corridor. CoStar reports the Average Sales Price in this market was $8.9 million or $174 per square foot. The average transaction was just a little over an acre at 50,900 square feet and total sales volume for this market was $88.7 million. Many of these sales were in the Peachtree corridor for high rise multifamily residential projects. Technology Square, adjacent to the Georgia Tech campus has seen high-rise office development with the Norfolk Southern headquarters building being the latest addition to the Midtown skyline.
My next blog will examine the World Champion Atlanta Braves’ move to a new stadium in 2017 and its resulting effect on real estate.