By Bill Adams, MBA, CCIM, CRB, ALC
As we reached the mid-point of 2022, the Atlanta Commercial Real Estate market was dealing with higher interest rates, the threat of a recession, inflation and the latest Covid-19 variant. Below I’ll review how the different real estate sectors – office, hospitality, multifamily, industrial, retail and land – have been affected by these and other challenges.
The office market is continuing to feel the effects of the pandemic. Some companies are requiring their employees return to the office. Many firms have instituted a “hybrid” schedule mixing working from the office and home. In some cases, employers are allowing staff to permanently work from home. These scenarios would seem to bode ill for the local market except for the fact that Atlanta and the metropolitan area continue to attract businesses to the region.
According to CoStar, at the end of the second quarter of 2022, the Atlanta office market had an inventory of 333 million square feet of space, an increase of .6% over the last 12 months. There is 5.4 million square feet under construction with a net absorption of 4.2 million square feet over the last year. The office vacancy rate is 13.6%, a slight decrease over the last 12 months, and the average rental rate is $27.12 per square foot. Office properties sold for an average of $228 per square foot, an 8.5% increase over the past year with a market capitalization of 7%. The threat of a recession and the increase in Covid cases are not good for this sector though and many companies may continue to reduce their office footprint.
Thankfully, the Atlanta hospitality market is beginning to show signs of life again as conventions and tourists begin to return to the city in greater numbers. Atlanta was named one of the North American venues for soccer’s World Cup in 2026, and that alone may speed up plans to add more hotel rooms to the Atlanta market.
CoStar reports that there are 109,796 hotel rooms in the city, an increase of 1.6% over the prior year. There are a total of 6,092 rooms currently under construction, including a 1,000-room Hilton Hotel on the Georgia World Congress Center campus in Downtown Atlanta. The current occupancy rate is 63.6%, an improvement of almost 21% over the last year. The average room rate is $113, an increase of 33.7% over the past 12 months. Hotels sell for around $129,000 per room with a market capitalization rate of 8%. Both numbers are slightly lower than last year’s figures. Again, Covid is the biggest threat in this sector and a recession could dampen both business and leisure travel.
The Atlanta multifamily market continues to thrive both intown and in the suburbs. Higher home mortgage rates are beginning to make purchasing a single- family home less attainable and have driven even more demand for rental properties.
According to CoStar, there are 557,747 units in the market, a 2.2% increase in the last 12 months. To meet expected increased demand, 32,606 units are currently under construction, an increase of almost 37% over this time last year. Only 5,612 units were rented in the last year – a drop of 79.2% – and I expect that this is a supply issue rather than a demand issue. The vacancy rate ticked up one percent from 6% to 7% and the average rent per unit was $1,625, an increase of 9%.
The multifamily complexes that sold averaged $223,000 per unit at a market cap rate of 4.5%. As mentioned above, higher interest rates will likely increase demand for rental apartments. A recession would temper that demand and higher commercial mortgage interest rates could increase capitalization rates for sellers.
As of mid-year 2022, the Atlanta industrial market continues its remarkable growth. Metropolitan Atlanta is a regional logistics center with world class transportation infrastructure. The Georgia Department of Economic Development and Tourism’s successful recruitment of two electric vehicle manufacturing facilities to the state, while not in metropolitan Atlanta, will have a ripple effect on the industrial market in the city.
CoStar reports that the inventory of industrial space reached 716 million square feet, an increase of almost 3% over 2021’s inventory. To meet the demand for industrial buildings, 38.5 million square feet of space is under construction, a 54.7% increase in construction activity. Almost 26 million square feet of space was leased over the past 12 months. This is a decrease of 11.3% over 2021 and as noted above in the multifamily report, more of a supply issue than a demand issue.
The vacancy rate for the Atlanta industrial market fell to 3.4% with an average market rental rate of $7.38 per square foot, an increase of 15%. The average sales price of an industrial property is $97 per square foot, up from $80 per square foot last year. The market capitalization rate for industrial properties is 5.8%. A recession might be the only real threat to this sector of commercial real estate.
The demise of “bricks and mortar” retail due to online shopping has been a topic of conversation for years and certainly was so during the height of the pandemic. As a result, the Atlanta retail market has experienced little new construction in the past several years. With the supply of retail space constrained and the population continuing to grow, the fundamentals of existing retail space are solid.
According to CoStar, the Atlanta retail market has 368 million square feet of space. There is only 2 million square feet under construction, thus the vacancy rate on the market is 4%, down from 5% last year. In a positive sign for this sector of the commercial real estate market, 4.9 million square feet of space was absorbed last year at an average rental rate of $20.13 per square foot. Retail properties sold for an average of $197 per square foot, up from $181 per square foot last year, at an average capitalization rate of 7%. An increase in Covid cases might again increase online shopping. Higher interest rates, especially credit card interest rates, and inflation could slow retail spending.
One of the challenges with the land market is that many land sales are sales of improved properties where a developer intends to demolish the improvements and build a new structure on the land. A property also may have environmental issues which often result in a discounted land sales price. Usually, the smaller the property size, the higher the price per square foot.
Here is a sampling from CoStar of average per square foot sales prices in the last year in the close-in Atlanta market:
– Downtown Atlanta – $645 per square foot
– Midtown Atlanta – $282 per square foot
– Buckhead Atlanta – $165 per square foot
– West Midtown Atlanta – $11 per square foot
– Memorial Drive Corridor – West – $65 per square foot
– Memorial Drive Corridor – East – $16 per square foot
The land market could be negatively affected by all four of the threats mentioned above if demand falls for new commercial real estate development. The good news is that inflation is good for tangible assets like land and improved properties.
All in all, though there is continued uncertainty in the market due to inflation and rising interest rates, the metro Atlanta commercial real estate market has seen improvements in the past year.
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