Cousins Properties (NYSE: CUZ) recently unveiled a series of strategic transactions to bolster its Sun Belt-focused office portfolio. The real estate investment trust (REIT) further expands its leading position in the Atlanta market while entering Nashville, Tennessee. These deals set the office REIT up to benefit from the continued growth of those strong markets.
Enhancing the core
Cousins Properties is making several moves to enhance its office portfolio. First, it's acquiring 725 Ponce -- a 372,000 square foot office property in Atlanta -- for $300.2 million. The property, built in 2019, is 100% leased. As part of the deal, the REIT also acquired a 50% stake in an adjacent land site for an additional $4 million that can support 150,000 to 200,000 square feet of development.
The company also entered a joint venture to develop a transformative mixed-use property in Nashville. The initial phase will consist of 448,000 square feet of office and retail space along with 542 multifamily units. Cousins will invest $275 million as part of its 50% ownership in the initial phase -- a planned phase II site that could accommodate 275,000 square feet of additional space -- and the rights to adjacent land parcels for future development.
The company is partially financing these investments by selling One South at the Plaza in Charlotte, North Carolina, for $271.5 million. The 891,000 square foot office building is currently 58% leased after a major tenant left once its lease expired in December. The 1970s-era building would have required substantial capital investment to successfully re-lease the vacant space.
Why these cities?
Cousins is expanding its reach in Atlanta, its largest market at 35% of its net operating income (NOI). The deal will benefit the company in both the near and long terms because it's purchasing a fully leased property and adjacent land that can support new development.
While the Atlanta office market faced some headwinds during the pandemic -- vacancy is at its highest level since 2013 -- rental rates continue to rise. That's due to strong demand as companies expand in the city, with Airbnb, Microsoft, and Alphabet's Google recently leasing space in the city.
With large companies continuing to relocate to and expand in Atlanta, vacancies should moderate, and rents should keep growing, which should enable Cousins to eventually move forward with constructing additional commercial space on the adjacent development site it acquired.
Meanwhile, Cousins has been seeking the right opportunity to expand into Nashville, and it found that in this development. One of the draws of this project is its location. It's right across the Cumberland River from Oracle's planned $1.2 billion campus in the city. The tech giant's presence will benefit this development by drawing other businesses to the region, driving demand for office space.
Nashville, which also experienced some pandemic-related headwinds, is rebounding strongly. Leasing activity totaled 950,000 square feet in the second quarter of 2021, bringing the year-to-date total to almost 1.6 million square feet, thanks in part to a big lease by Amazon. Meanwhile, rents grew by 5% in Q2, continuing the steady upward climb in recent years.
These new additions will be a nice complement to Cousin's portfolio, which also includes properties in Houston, Dallas, and Austin, Texas; Tampa, Florida; Charlotte, and Phoenix. Demand for space in its existing buildings was strong during Q2, as the office REIT signed 484,000 square feet of office leases, 74% of which represented new and expansion leases.
Rental rates on second-generation leases were 12.9% above expiring leases. CEO Colin Connolly noted that "As companies plan their return to the office, they are focused on being in an environment where employees are excited to come to work and collaborate with one another." That's increasingly Class A office space in fast-growing Sun Belt markets.
Getting better in great markets
Cousins Properties is enhancing its already strong presence in Atlanta and expanding into Nashville. While both markets faced some pandemic-related headwinds, they're bouncing back strong as companies relocate and expand into those cities for better business climates. That puts Cousins in a stronger position to benefit from this growth in the coming years.