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Office Market Sector Still Slugish in Atlanta

According to a recent report from Grubb & Ellis Company, the 144.4 million-square-foot Atlanta office market in the third-quarter 2011 has a 22.9% vacancy level. The reasons appear to be related to slow growth, undercapitalized ownership and starving landlords. Class A office space in the metropolitan Atlanta area decreased 9 percent to $22.62 per square foot during the quarter, and Class B rates dropped 2 percent to $14.48. The inventory of available sublease space decreased to roughly 3.6 million square feet in the third quarter, according to Grubb & Ellis Company, a drop of approximately 315,000 square feet on the previous quarter. Why the continued vacancy rate? For starters, there is a drop in rental rates due to unemployment. (In the legal sector, July, 2011 brought an increase in unemployment claims for Georgia lawyers.) Secondly, tenants are not renegotiating leases and moving to new office space. Principal Dan Granot of Joel & Granot Real Estate, LLC noted that "some submarkets have been head-and-shoulders above others in terms of recovery, but I do not know if what we are seeing are the results of true absorption or just a game of 'musical chairs' playing out."

Atlanta tenants are supporting the trend of moving from older office space to newer office space where they can seek higher quality. The legal profession is no exception. For instance, the law firm Fisher & Phillips moved from a prominent Buckhead space to a Midtown space, siting new quality accommodations which supports Rob Binion's (associate broker at LaVista Associates, Inc.) theory that 2011 "has proven to be a year of "flight to quality".

According to Binion, a flight-to-quality trend is most evident in the Class A sector of the Buckhead market, "with the overwhelming share of positive absorption for the entire city occurring in here - at the expense of Class B buildings in Buckhead and every other submarket in town". In March, 2011, we posted an article noting law firms' reactions to landlord's response to lease renewals. Decline of concessions or re-negotiations of the lease was highlighted. The climate has not changed. Lack of incentives for providing incentives for beneficial lease renewal terms and thereby, helping prevent law firms from exiting current law office space is not necessarily derived from Atlanta landlords. Binion seems to uncover one of the reasons why landlords have been unable to provide appropriate concessions to retain law firms: owners of these buildings have no capital available to pay for lease-up expenses, such as marketing, advertising, tenant improvement allowances to commissions and credit checks. If owners and/or venture capitalists holding (equity or debt) in Atlanta office buildings have dry coffers, the sluggish recovery will continue.

Simply, there are no funds available for needed improvements and marketing techniques. According to Binion, the " flight to quality" will accelerate. This leaves the owners of older Class B and C buildings effectively pulling themselves out of the leasing market until more funds are available to provide necessary factors or retaining tenants. Metro Atlanta landlords will have to remain aggressive in order to compete at least through 2012, according to Russ Jobson, Senior Vice President and Principal in Colliers International (Atlanta office). The decline of the recovery of the Atlanta office market sector directly influences the sublease submarket. If tenants cannot negotiate better deal terms for even a short term lease, their option for subleasing their space is a viable option. Additional "dark space" is not an option for profitable law firms. Atlanta law firms and other law firms around the country are turning to, an exclusive site for lawyers posting their empty law space and sharing law space with lawyers.

On the other hand, if the "flight to quality" continues, according to Binion's theory, law firms may relocate to a space which more appropriately accommodates the number of lawyers currently employed. Notes: Atlanta Business Chronicle, Commercial Real Estate Section, November 4-10, 2011. See Also: Law Firms with Unused Offices, Persistence of the Economic Downturn Forces a New Legal Landscape , Law Firms - Don't Use Your Empty Offices For Storage - It's a Waste