Atlanta’s office market feels like a story of winners and losers. Tenants continue to pay increasing rents for the best located, highest-quality spaces while the sector overall experiences negative office absorption. Those big, shiny objects, so to speak, offer quite a contrast to the results of continued office sector adversity brought on by reduced office attendance, a downsizing leasing trend and swelling sublet space.
Who’s in the best position to win? Well-capitalized owners with stabilized debt (or none) that can meet the increasing tenant demands for skyrocketing tenant improvement costs and other rental concessions. With continued construction cost increases and downward pressure on base rental rates, fiscally sound landlords with longer-term business plans are in the best position to transact.
And, of course, the newest buildings with the best location, amenity package and a reasonable commute for the majority of the workforce continue to thrive. CoStar Group reports that during the past 12 months, net absorption in office buildings completed before 2020 was negative 4 million square feet compared to 1.1 million for newer properties.
The Atlanta office market has produced some sizable transactions this year, fueling some optimism among landlords with larger blocks of space for lease. The most significant activity seems to favor a finite number of large, impactful corporate deals.
For most Atlanta office players though, patience and perseverance are essential. The 2.1 million square feet in negative absorption in the past 12 months has market vacancy near or exceeding 2011 levels (16.5 percent), according to CoStar. Market asking rent growth came in at 1.3 percent with projections for a negative turn in early 2025.
Call it small ball or “rightsizing,” but good things do come in little packages. Smaller spec suites in good locations are also winning tenants. Quality neighborhood offices with walkable access to attractive, desirable amenities, especially the Atlantas BeltLine, are finding traction.
CoStar highlights the Eastside BeltLine and West Midtown as “bright spots of resilient demand [that] exist around pockets of 18-hour activity.” A year ago, rents along the 22-mile former railway corridor loop were setting records at 50 percent above the market average.
In late August, CoStar cited multiple sources talking about “record-breaking” asking rents and more than $60 per square foot starting rents in dense submarkets like Ponce City Market, Coda and West Midtown — more than double Atlanta’s average office asking rent of $29 per
square foot.
The rightsizing of tenants, especially those larger leases with terms dating back before 2020, will also continue to impact absorption. Additionally, early renewals and lease extensions are on the rise. This results from many landlords preparing for potential refinancing or sales, while tenants want to lock in low rates with newly optimized floorplans.
Slow-developing situation
It’s no surprise given office market headwinds that very little new development is taking place in the Atlanta metro. Only around 50 percent of under-construction properties have been preleased compared to about three-quarters of the 15.3 million square feet delivered since 2020, according to CoStar.
The market correction, if you will, with regard to office construction includes addition by subtraction: expect to see some older buildings redeveloped into new uses. That especially pertains to Downtown Atlanta, which with its several high-vacancy buildings is getting a lot of conversion attention.
“Relatively subdued” is how CoStar describes Atlanta’s office market construction since the Great Recession, and then came a decline in construction starts of around 60 percent from 2022 to 2023. The market’s current under-construction office pipeline is at its lowest level in a decade.
Forecast
With the recent lack of construction in Atlanta’s office market, supply-side pressure should diminish in the coming years, setting the stage for healthier demand moving forward. Hybrid work is becoming the norm, which is good news for landlords, as the remote alternative seems to be only working for a smaller section of the market.
Nationally, the late August news that the economy grew faster than initially thought in the second quarter with corporate profits also rebounding was definitely welcome. With September’s interest rate cuts by the Federal Reserve, investor optimism has been boosted and the patience of Atlanta’s office players seems that much closer to paying off.
— By Jeff Pollock, owner and managing principal of Pollock Commercial. This article was originally published in the October 2024 issue of Southeast Real Estate Business.