Lack Of Office Buildings For Sale Pushing Trophy Towers To Record Prices

Earlier this year, State Farm's headquarters in Central Perimeter shattered Atlanta's office sale price record at more than $450/SF. It likely will not stand for much longer.

Three Alliance Center — which Tishman Speyer placed for sale earlier this year — is expected to top $500/SF when it finds a buyer. Tishman Speyer is rounding up best and final offers as of press time.

“When you start looking at replacement costs, $500/SF is the first building we'd see trade in this cycle that would exceed replacement costs, albeit not by much,” JLL Managing Director David Tennery said.

Current replacement cost on a trophy office tower in Atlanta is more than $400/SF, Tennery said.

There are a number of factors influencing Atlanta's office pricing: rising rents, strong job growth, continued corporate expansions and very few new office buildings currently for sale.

But the biggest factor is sheer demand. There is a wave of capital shopping for real estate in Atlanta, just not much prime property for sale.

“We're seeing increased activity in foreign accounts as offshore capital is seeking both safe haven environments to invest as well as yield,” Eastdil Secured Managing Director Michael McDonald said.

With foreign investors, the need to grow money is driving capital to the U.S. Europe has been experiencing very slow growth, and there are geopolitical concerns in other parts of the world.

At the same time, foreign capital is also venturing further into the American mainland instead of solely focused on gateway markets along the U.S. coasts like New York and Los Angeles, McDonald said. Atlanta has been a beneficiary of that trend.

Nearly $2B in office assets have traded in Atlanta so far this year. While a strong number, it is down from last year when some $4B in buildings traded hands, according to Colliers International. Some $650M sold in Q3 alone, Colliers officials said.

But that is not for a lack of demand, Tennery said.

“When you look at the inbound capital flows … it is certainly not quite today what it was in 2016,” he said. “But I think it is every bit as much on supply than demand. We see some frustration in the investment world [of those] who would like to place some capital here.”

There is a particular lack of core office for sale, Tennery said. McDonald said what matters most to investors in these high-priced sales is less the money per square foot, and more about the creditworthiness and quality of the rent roll. And Atlanta's office market is seeing record rents with little new supply to give it much competition.

“Yield trumps price per square foot. Always has, always will,” he said. Eastdil is currently brokering the sale of Resurgens Plaza in Buckhead to Chicago-based Zeller Realty Group. McDonald could not comment on pricing.

But even for value-add office buyers, Atlanta is becoming a thin market, The Ardent Cos. Managing Director Scott Werbel said.

“As an investor, we are not buying $400/SF,” Werbel said. "We're buying value-add where we're seeing true ability to add value not only on occupancy, but on rate."

This past summer, Ardent purchased Piedmont Center in Buckhead. Ardent is currently pursuing potential investments in Midtown and Buckhead, but the firm has nothing under contract, Werbel said.

“Every year since 2014, it has become more and more difficult to find the right deal for us,” he said.

McDonald also said there is a growing hesitancy among some investors to buy office at a point in the economy, which is now experiencing the longest postwar expansion in history.

“Anybody over the age of 50 starts asking the question, where are we in this cycle? Are we at the end?” McDonald said. “I constantly get asked the question, 'You know, Mike, what inning are we in?' I think we're in the bottom of the sixth, but it's a date-night doubleheader. So grab a beer.”

Werbel will be among the industry experts, including North American Properties partner Mark Toro, Ares Management principal Kary Nordholz and Northwestern Mutual Director Felix Figueroa at Bisnow's Atlanta State of the Market event, 7:30 a.m., Thursday, Dec. 5 at The Fountains at Piedmont Center.