Atlanta Metro Area

Fourth Quarter 2009

DESPITE NEAR-TERM WEAKNESS, POSITIVE TRENDS DEVELOPING

Atlanta ofce market fundamentals are expected to moderate through year end due to soft ofce-using employment and signicant development activity. Despite this, longer-term forecasts suggest a stabilization of ofce operations in the mid- to latter half of 2010. Quarterly employment reductions within the ofce-using sectors have averaged 14,000 jobs over the last year. During the fourth quarter of 2009, however, it is estimated that ofce-using job cuts will total just 2,000 positions. While data for one quarter does not indicate a trend, it does suggest that the worst is likely in the past, and demand for ofce space in Atlanta should stabilize within the next 12 months. Also, recent announcement of corporate expansions and relocations are a recent positive development. The Centers for Disease Control and Prevention, for instance, will invest $300 million to expand its Chamblee campus, while New York City-based testing company Kaplan Inc. recently leased another 100,000 square feet in Alpharetta. In the near term, however, vacancy will trend higher as a signicant amount of stock begins lease up, particularly in Buckhead and Midtown. Investment activity in Atlanta will likely remain moderate through year end and into early 2010 as owners resist selling properties through softer operating conditions and buyers seek greater discounts due to heightened market risk. Quarterly transaction velocity is near levels last recorded in 2001, and more conservative lending and tighter underwriting are expected to keep activity at its current pace until job growth propels occupancy improvements. Initial yields will continue to tick up as buyers account for a greater use of concessions and prospects for higher vacancy. Cap rates have risen to the 8 percent range for Class A properties, while Class B assets are trading at initial yields in the mid-9 percent range. Looking forward, investment activity is expected to increase in the second half of 2010 as operations begin to stabilize.

2009 ANNUAL OFFICE FORECAST

4.2% decrease in total employment

Employment: In Atlanta, total employment is forecast to contract 4.2 percent, or by 100,000 jobs, in 2009. Last year, nearly 93,000 positions were trimmed from payrolls. Ofce-using employers will cut 36,700 workers, nearly the same as losses in 2008.

3.5 million square feet will be completed

Construction: This year, 3.5 million square feet of ofce space is expected to be completed in Atlanta, a 2.5 percent addition to stock and up from 2008, when 1.9 million square feet was delivered.

300 basis point increase in vacancy

Vacancy: The average vacancy rate in the metro is forecast to reach 19.6 percent in 2009, increasing 300 basis points from last year, when vacancy rose 150 basis points.

1.9% decrease in asking rents

Rents: Asking rents are projected to fall 1.9 percent this year to $21.01 per square foot, and effective rents are expected to drop 3.4 percent to $17.07 per square foot. In 2008, asking rents advanced 1.1 percent, while effective rents declined 0.7 percent.

ECONOMY

Employment Trends
6%
Year-over-Year Change Nonfarm Office-Using

Total employment in the Atlanta metro area contracted by about 93,000 workers since the end of 2009, with cuts recorded in nearly every month during that time. Over the past 12 months, 145,000 positions have been lost, a 5.7 percent decline. Professional and business services rms have trimmed 41,000 jobs in the last year, including 25,000 positions year to date. In the trade, transportation and utilities sector, 31,200 employees have been eliminated; so far in 2009, 14,400 workers have been let go in the segment. Despite the recent staff reductions, the metro is beginning to attract corporate relocations. ATM manufacturer NCR, for instance, will move its headquarters to Duluth next year, bringing 2,000 jobs to Gwinnett County. Outlook: In Atlanta, total employment is forecast to contract 4.2 percent, or by 100,000 jobs, in 2009. Last year, nearly 93,000 positions were trimmed from payrolls. Ofce-using employers will cut 36,700 workers, nearly the same as losses in 2008.

3%

0% -3% -6%

05

06

07

08

09*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

CONSTRUCTION
Office Construction Trends
4
Millions of Square Feet Completions Absorption

Developers have added an estimated 2 million square feet of ofce space to metro stock over the past year, following the completion of 2.2 million square feet during the previous 12-month period. Approximately 3 million square feet was under construction as of the end of the third quarter. The space is contained in six projects that have delivery dates scheduled through 2010. Current construction activity is concentrated in the Midtown/Pershing/ Brookwood and Buckhead/Lenox areas. Inventory levels in each submarket are expected to increase by 4 percent and 11 percent, respectively, this year. Outlook: This year, 3.5 million square feet of ofce space is expected to be completed in Atlanta, a 2.5 percent addition to stock and up from 2008, when 1.9 million square feet was delivered.

2 0 -2

-4

05

06

07

08

09*

* Forecast Sources: Marcus & Millichap Research Services, Reis

VACANCY

Vacancy Rate Trends

24% 21%
Vacancy Rate Metro Area United States

The additions of new, largely vacant space, combined with a decline in tenant demand, raised the marketwide vacancy rate 130 basis points in the third quarter to 18.7 percent. Negative net absorption has totaled about 3 million square feet over the past 12 months. Among Class A properties, negative net absorption of 500,000 square feet during the last two quarters has driven up the vacancy rate 140 basis points to 17.4 percent. Vacancy in Class B/C properties rose 70 basis points in the third quarter to 20 percent on negative net absorption of 460,000 square feet. Year over year, lower-tier vacancy has climbed 270 basis points. Outlook: The average vacancy rate in the metro is forecast to reach 19.6 percent in 2009, increasing 300 basis points from last year, when vacancy rose 150 basis points.

18% 15% 12%

05

06

07

08

09*

* Forecast Sources: Marcus & Millichap Research Services, Reis

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RENTS

Year-over-Year Change

Since the beginning of the year, asking rents have declined 0.5 percent to $21.32 per square foot. Measured year over year, asking rents are down 0.2 percent. Effective rents have dropped 2.2 percent since December, including a 1 percent decrease in the third quarter to $17.29 per square foot. Asking rents for both Class A and Class B/C product have declined 0.5 percent during the past year, reaching $24.39 per square foot and $17.40 per square foot, respectively. In the previous 12-month period, Class A rents rose 3.1 percent, and asking rents in the lower tiers increased 2.7 percent. Concessions surged from 17.5 percent of asking rents in the third quarter of 2008 to almost 19 percent of asking rents in the third quarter of this year. Currently, the Buckhead/Lenox submarket has some of the lowest concessions in the metro at 17 percent of asking rents. Concessions are expected to rise closer to the metro average, however, as new space begins to lease up. Outlook: Asking rents are projected to fall 1.9 percent this year to $21.01 per square foot, and effective rents are expected to drop 3.4 percent to $17.07 per square foot. In 2008, asking rents advanced 1.1 percent, while effective rents declined 0.7 percent.

Rent Trends
8% 4% 0% -4% -8%
Asking Rent Effective Rent

05

06

07

08

09*

* Forecast Sources: Marcus & Millichap Research Services, Reis

SALES TRENDS**

Sales Trends
Median Price per Square Foot

Sales activity dropped about 70 percent so far this year compared to the same period in 2008. The median price of properties sold in the last 12 months has declined nearly 18 percent to $132 per square foot, as investors are anticipating increased operational difculties in the quarters ahead. The median price is currently near a level last recorded in 2005. Cap rates average in the 8 percent range for recently sold Class A properties, up about 150 basis points over the past year. Lower-tier assets are trading at 9.5 percent and above, depending on tenant mix and location. Outlook: The Midtown/Pershing/Brookwood and Buckhead/Lenox submarkets are expected to register greater operational challenges in the near term as a result of heightened construction activity. As a result, initial yields in these areas will likely rise to compensate for increased concessions.

$180 $160 $140 $120 $100

05

06

07

08

09*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

MEDICAL OFFICE

Approximately 790,000 square feet of medical ofce space came online in the 12 months ending in the third quarter, up from nearly 740,000 square feet in the preceding year. Medical ofce vacancy of 14.8 percent in the second quarter was 120 basis points more than the rate posted one year earlier. Negative net absorption during the last 12 months has totaled approximately 1.1 million square feet. Asking rents for medical ofce space ended the third quarter at $19.34 per square foot, down 4.6 percent from the third quarter of 2008. Medical ofce transaction velocity has declined by 44 percent year over year. Activity will remain constrained in the near term due to tight capital markets and conservative underwriting.
Vacancy Rate

Medical Office Vacancy

18% 15% 12% 9% 6%
Metro Area United States

05

06

07

08

09*

* As of 3Q 2009 Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

** Data reect a full 12-month period, calculated on a trailing 12-month basis by quarter.

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CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION

Local and regional banks are the primary sources of nancing today, though life insurance companies are expected to start re-emerging early next year. Overall, lenders are focusing on smaller deals, with transactions over $15 million difcult to nance. Portfolio lenders are issuing ofce nancing at all-in rates of 6.75 percent to 6.90 percent for ve-year loans and up to 7.25 percent to 8.63 percent for a 10year term. Loan-to-value requirements range from 55 percent to 65 percent. Two key issues restricting lending activity are difculties assessing values and expectations for further weakening in fundamentals. Despite greater equity requirements for borrowers, lenders are unwilling to take risks. Institutions in particular are unlikely to increase lending until some stabilization in fundamentals occurs and rising transaction velocity supports price discovery. Maturing debt poses a signicant risk to the commercial real estate sector. The governments TALF program could jump-start the CMBS market, but the direct beneciaries will be large owners with strong-performing assets. On a positive note, at-risk borrowers are likely to nd lenders amenable to loan extensions and/or modications.

Alan L. Pontius Senior Vice President, National Director National Ofce and Industrial Properties Group Tel: (415) 963-3000 apontius@marcusmillichap.com

SUBMARKET OVERVIEW

The Centers for Disease Control and Prevention plans to invest up to $300 million in two new ofce towers at its Chamblee campus in the Northeast Atlanta/I-85 North submarket. The project would relocate nearly 2,000 employees from around the metro, which could spark additional interest in area ofce space. The Midtown/Pershing/Brookwood submarket is scheduled to receive approximately 2 million square feet of new ofce product over the next three years, increasing area stock by almost 15 percent. As a result, vacancy is expected to rise past 22 percent upon the completion of projects in 2012, driving owners to raise concessions as they compete for tenants.

Prepared and edited by Market Analyst Research Services For information on national ofce trends, contact National Research Manager Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Atlanta Ofce: Regional Manager jleonard@marcusmillichap.com 500 Northpark Town Center 1100 Abernathy Road, N.E. Building 500, Suite 600 Atlanta, Georgia 30328 Tel: (678) 808-2700 Fax: (678) 808-2710 Price: $150 Marcus & Millichap 2009 www.MarcusMillichap.com

Greg Clemmer

SUBMARKET VACANCY RANKING

Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

John Chang

Submarket
I-85 North Inside Perimeter East Atlanta/Decatur West Atlanta/I-20 West/I-75 Buckhead/Lenox Northlake/Stone Mountain North Central/I-285/GA 400 Midtown/Pershing/Brookwood Roswell/Alpharetta Marietta/East Cobb/I-75 Cumberland/I-75 Peachtree Corners Northeast Gwinnett/I-85/I-285 Far South Airport/South Atlanta Downtown

Vacancy Rate
10.6% 13.2% 13.4% 15.7% 16.0% 16.5% 16.6% 17.3% 17.6% 17.7% 18.3% 18.8% 21.0% 21.7% 22.6%

Y-O-Y Basis Effective Y-O-Y Point Change Rents (psf) % Change

320 -210 480 270 -400 180 -180 300 -40 340 170 -210 840 320 110 $14.55 $15.80 $19.59 $21.85 $14.12 $18.36 $21.44 $15.95 $13.55 $17.18 $14.27 $13.28 $13.71 $11.89 $17.89 -4.8% 2.1% -3.2% -6.0% -0.8% -2.0% 2.0% -3.3% 0.7% -4.1% -0.8% 1.8% -6.4% -9.5% -5.4%

John Leonard

Notes: Employment growth is calculated using seasonally adjusted quarterly averages. Construction, rent and vacancy gures exclude build-to-suit, ex space and medical ofce properties unless otherwise noted.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Real Capital Analytics, Reis, Torto Wheaton Research Services.