By Bill Adams, Founder, Adams Realtors & Adams Commercial Real Estate
As we closed out the year 2022, the Atlanta Commercial Real Estate Market continued to fare well despite the threat of a recession and nagging inflation caused by supply chain issues related to the Covid-19 pandemic and the war in Eastern Europe. At the end of the year the national unemployment rate stood at 3.5% while the unemployment rate for the Atlanta region was 2.6%. In a positive sign, the CPI, a measure of inflation, was at 6.5%, down from 8.2% at the end of the 3rd Quarter.
The Federal Reserve Bank continued to raise the Federal Funds Rate and on December 31, 2022, that rate was 4.10%. Many economists predict that the “terminal” rate for Fed Funds in 2023 will be in the neighborhood of 5% to 5.5%. Some economists are pushing off the threat of a recession until the second half of 2023. Others forecast a “soft landing” with a short recession or no recession at all.
Let’s review how the commercial real estate product types fared in Atlanta in 2022.
The Atlanta office market continues to feel the effects of the Covid-19 pandemic as many companies are still allowing their employees to work from home. At the end of the year, some firms were requiring employees to spend some time in the office, usually three days a week. According to the Washington Post, Kastle System which manages building entry systems, stated that in the 10 largest metro areas in the U.S., office occupancy was up to 50% of pre-pandemic levels. I expect that this trend will continue to gradually improve in 2023, with the pandemic becoming more of an endemic. This trend will help to shore up the office market.
This market is bifurcated by class with the newer, modern Class A properties doing well and the B and C buildings struggling. A good example of this in the Atlanta Market is the Midtown office market with mostly newer buildings and the Downtown market with mostly older properties. Many of these older buildings may be converted into other uses. Multifamily housing and hospitality conversion opportunities often target older office buildings for adaptive reuse.
According to CoStar, at the end of 2022 the Atlanta office market contained about 334 million square feet of space. Over the year, 3.3 million square feet of new space was delivered, and 1.3 million square feet of space was absorbed. The overall vacancy rate for the Atlanta office market stood at 14.2% while the 12-month rent growth was 1.7%.
The Atlanta hospitality market continues its recovery from the bleak days of the pandemic.
Business travel has been slow to recover with many businesses using Zoom and similar tools to reduce the necessity of face-to-face meetings and cut down on travel expenses. Still, business travel is on the rise as many businesses are coming to the realization that face-to-face meetings need to be part of their business model. The city hosted 20 conventions in 2022 with Dragon Con attracting over 60,000 attendees and Primerica’s convention attracting over 30,000 people.
Atlanta continues to attract tourists with its excellent cultural and sports attractions. However, many hotels are still facing staffing issues that began with the pandemic in 2020.
At the end of 2022, CoStar reports that there were 111,636 hotel rooms in Metro Atlanta.
The occupancy rate was 65%, up 8.1% over the last year and down from a pre-pandemic 70%. The Average Daily Rate was $118.24, and the Revenue per Available Room was $76.79. There are 4,900 rooms under construction and 2,100 rooms were delivered in 2022. According to CoStar, the largest hotel sale in 2022 was the sale of the Renaissance Atlanta Midtown for $74.9 million or $246.00 per key.
At the close of 2022, the Atlanta multifamily market continued to show some signs of weakness – slow rent growth and poor absorption. Whether these conditions are just a minor bump in the road or a long-term trend, it is too early to tell. Atlanta’s fundamentals remain strong with low unemployment and continued job creation though. Since mid-year 2022, home mortgage interest rates have more than doubled and single-family home prices continue to rise. At the end of 2022, the average Intown Atlanta home sold for $670,000 with an interest rate of 6.7%. Higher home prices and interest rates ought to price many potential buyers out of that market and drive them into (or keep them in) the multifamily rental market.
The prospect of higher interest rates along with increased material and labor costs may dampen development of some new multifamily properties. Less supply and unaffordable “for sale” homes should bode well for long term rent growth and absorption. In keeping with the adage, that “all real estate is local,” I see Intown Atlanta multifamily properties outperforming other locations in the metro area. Many of these properties are in walkable, transit-oriented areas with abundant amenities.
CoStar reports that at year end, the Atlanta multifamily market consisted of 484,241 units with a vacancy rate of 9.2%. Developers delivered 14,532 new units during 2022 and the absorption rate was a negative 426 units. Annual rent growth was an anemic .8% but, in spite of all these issues, sales volume was $12.6 billion. Investors continue to find the Atlanta multifamily market an attractive place to invest.
The Atlanta industrial market continues to outperform other product types in the commercial real estate space. The attributes that make Metropolitan Atlanta a leader in the industrial market differentiate it from its competitors. Three Interstate Highways converge in Downtown Atlanta, connecting the city with the east coast, midwest and the southern tier of states all the way to California. Two major railroads, CSX and Norfolk Southern provide rail connections to population centers throughout the country as well as ports on both coasts. The ports of Savannah and Charleston are less than a half day’s drive away. Hartsfield-Jackson International Airport links the city with suppliers and markets in Asia, Europe and the Americas. Because of these linkages, Atlanta continues to be a major distribution hub for the southeast. The Atlanta industrial market continues to be especially attractive to online retailers.
According to CoStar, the Atlanta market has over 805 million square feet of industrial space. In 2022, 23.4 million square feet were added to the market and 15.8 million square feet of space were absorbed. The vacancy rate was up slightly to a still low 4% and rent growth was a healthy 12.3%. Sales volume was $5.5 billion in 2022, down from 2021’s total.
Atlanta’s population growth and the lack of much new development contributed to the retail market’s good performance in 2022. Competition from online retailers remains a challenge and the shortage of workers in the restaurant industry continues to be an issue with food service operators. Adaptive reuse projects involving declining regional malls and shopping centers continue to have an impact on the supply of retail space in the market. As a result, this market remains a landlord’s market with a low vacancy rate and healthy rent growth. Well located grocery-anchored shopping centers continue to prosper. Regional malls, like Lenox Square and Phipps Plaza, that are constantly reinventing themselves, continue to do well.
According to CoStar, the Atlanta area has 368 million square feet of retail space. In 2022, 1.9 million square feet of new space was delivered, representing one half of one percent of the total space in the market. In the last year, 3.4 million square feet of retail space was absorbed which led to a historically low vacancy rate of 3.8%. Rent growth was a solid 7.4% and a total of $4.5 billion retail properties sold in 2022.
As we have stated in earlier reports, the Atlanta land market is difficult to define because a developer may purchase an improved property and then demolish an existing building to develop the land.
Here is a sampling from CoStar of current Average Sales Prices in the markets within about a 6-mile radius of Downtown Atlanta. The sales prices vary by location and the size of the property. As you know, the size of a property usually has an inverse relationship with its price per square foot.
Submarket Average Price Per Square Foot
North Downtown/South Midtown $178
North Midtown $319
West Midtown $20
Castleberry Hill $53
Grant Park/Old 4th Ward $68
East Atlanta $22
Little 5 Points $64
Downtown Decatur $43
The 2022 Atlanta Commercial Real Estate Market was the tale of two halves. The first half of the year was a continuation of the low interest rate environment and, despite high inflation, good confidence in the overall economic outlook. The second half of the year saw markedly higher interest rates and a gradual tapering of the inflation rate. Because of rising interest rates and the threat of a recession, many developers began to tap the brakes on proposed developments.
The Atlanta market continued to have great fundamentals with strong population growth, world class transportation infrastructure and low unemployment. Despite the headwinds mentioned in this report, I expect that 2023 will be another solid year for the Atlanta CRE market.
Questions or comments about this 2022 year in review? Contact me at 404-688-1222 or email@example.com.