By Tony Bartlett
Atlanta office job growth has been booming recent years. A decades-long shift in the local job market away from industrial jobs and toward high-salary, office-using employment took on new strength beginning in 2010. In fact, the gap between industrial and office employment – more than 150,000 jobs – is wider today than ever before in Atlanta.
This intensifying shift has driven significant demand for office space, as you can imagine. Yet Atlanta has seen little construction activity since 2010 compared to prior periods. For example, the previous 20-year average (1990-2010) of office space delivered per year was 4 million square feet, but the post-recession era spanning 2011 to 2016 only saw an average of 496,000 square feet delivered annually.
A confluence of factors is responsible for the slow pace of construction. First, finance and construction costs have skyrocketed in recent years due to structural changes in other product types (i.e., industrial and multifamily came roaring back to life), post-recession financial reforms, and rising demand for construction labor with the simultaneous building of SunTrust Park and Mercedes-Benz Stadium, to name a few big projects around town.
Second, the replacement cost for office buildings has shot up dramatically. Costs were as low as $325 per square foot in 2013 but today have risen to over $425 per square foot for CBD properties, a 31 percent jump in just three years.
Third, companies are finding new, more efficient ways to use their office space. There’s a new wave of so-called “creative” office designs have enabled employers to vastly increase their use density, and the rise of more flexible work schedules has allowed employees to spread their work hours out over the day, increasing the use of space that would have otherwise sat vacant after the end of the workday.
As a result, the number of jobs per 1,000 square feet of office space (an industry-standard measure of density) has been increasing steadily since 2009. At its low in 2009, that measure was less than 3.4 jobs per 1,000 square feet; today, it is nearing the 4 per thousand mark.
Yet it’s common these days for companies to fill office space at rates of 5 to 6 per thousand, or higher. In fact, some co-working companies can achieve office densities of 10 workers per 1,000 square feet of office space, demonstrating what is possible with this new wave of space use.
To understand the significance of this, consider this fact: from an employer’s perspective, the rent cost per employee at a 4-per-thousand square feet density at $20 per square foot is the same as $50 per square foot at a 10-per-thousand density – more than double.
Make no mistake: employers have every incentive to increase their use density and will continue to do so to alleviate the pressure of rising rents.
So, now that they have figured out how to fit more people into the same amount of space, the only limiting factor becomes logistics. That is, how do you get all those people in and out of your building?
We’ve got the answer: Build more parking.
This especially makes sense in a region that lacks extensive commuter rail and whose highways are typically gridlocked – or collapsed. That means for the foreseeable future, the importance of parking will only increase as companies increasingly rely on density to control cost.
The likely starting spot for this new parking trend will be suburban office buildings with surface lots. Instead of building a new building elsewhere with more ample parking, a better investment is to simply build on top of those surface lots.
We’ve already heard about some landlords contemplating building more parking, including Mainstreet Capital and The Davis Companies at their 234,000-square-foot Northeast Center property in Tucker. Given the current economics and trends, we expect to see more properties move in this direction.
The bottom line is that what constitutes “market” parking will continue to grow over the remainder of this cycle, while landlords who add parking now will reap dividends as demand for high-parking office properties outpaces the market as a whole.
Tony Bartlett is an Executive Vice President of Lincoln Property Company in Atlanta, where he is responsible for all of the firm’s commercial activities in Georgia.