Atlanta lands big office deals but uncertainty remains in short term
In many ways, Metro Atlanta is the tale of two office markets. Google, Microsoft, Papa John’s, Visa and FanDuel are just a few of the heavyweights that have signed major deals over the past year and a half, fueling rental activity that is approaching pre-pandemic norms. Much of this action has been centered on the central business district (CBD), which saw a 68% year-over-year increase in rental volume compared to the first quarter of 2021. According to research from the CoStar Group, market-wide leasing volume totaled 3.2 million square feet in the first quarter, which is the 10-year quarterly average.
Midtown, where more than 2 million square feet of new product is under construction and where the majority of corporate heavyweights have planted their flags, led all submarkets in rental activity, with Cushman & Wakefield reporting nearly 314,000 square feet of new leases signed in the first quarter. Midtown’s general walkability, abundance of high-rise residential units, new office buildings, and access to talent from local universities and public transit have helped it become a talent magnet for major employers. and one of the main submarkets in the country.
However, the vast majority of office tenants in the Atlanta metro area are small to medium sized businesses, and most of those 3,000 to 10,000 square foot users are simply not transacting at this time. Historically, these tenants hired landlords about two years before their lease expired, with many opting to renew for continuity and stability. But the combination of ambiguity over what a long-term return to power should look like, along with new market headwinds like rising gas prices, inflation and potential interest rate hikes interest have created great uncertainty within this sector.
Most small to mid-sized tenants due for renewal in the next two to three years remain in a wait-and-see mode and will likely hold out for another 12-18 months in hopes that landlords will be more willing to give a better set of concessions and more favorable conditions for smaller footprints.
Although average asking rates recently topped $30 per square foot for the first time in market history, overall rent growth is almost at a standstill now. An easing of at least some submarkets is a possibility, but many landlords WHO have paid top dollar for their assets will likely feel enough pressure from investors to hold the line and steer tenants toward more generous concessions. .
A record more than 6 million square feet of sublease space is also weighing on office owners. The next six months will tell if we are headed for a real tenant market.
A key scenario emerging in suburban markets is the “retro renaissance” occurring in many Class B and C buildings. The repositioning of many 1980s and 1990s properties has accelerated in recent months as new many landlords aim to stem the tide of tenants leaving older buildings for newer, flashier projects.
New wellness features, tech tools, and access to high-end shopping and dining are the new “must-haves” for many workers who want to return to the office, but are closer to home and have a look different than they did before the pandemic. Many owners have shown a willingness to spend the money as more companies start looking for new options outside of CBD, with the survival instinct also serving as a healthy motivation.
A joint venture of directors of SK Commercial Realty and The Goldenrod Cos. recently unveiled plans for a $6 million repositioning of 900 Circle 75 in Atlanta’s Cumberland submarket, with renovations on the 17-story office tower slated for completion this summer. Originally built in 1985 and directly adjacent to The Battery Atlanta, the Circle 75 project reflects a broader enthusiasm among owners operating in “suburban-style” areas with access to vibrant amenity bases. Other recent examples include a major repositioning at Campus 244 in the central perimeter.
A complete redevelopment of the existing office building will include the addition of timber construction, producing a building of over 380,000 square feet, an outdoor terrace and post-COVID workspace features. The adjacent vacant lot will be developed to accommodate a creative mixed-use work campus featuring additional office, hospitality and dining space that will be unique in the submarket.
Many tenants are willing to pay a premium for office space to get the best buildings and the latest equipment to retain employees, but new construction is often out of reach. Many of these suburban properties are able to split the difference and could take a bigger share of the market in the years to come if the trend becomes mainstream.
Overall, the suburban submarkets performed well in the first quarter, signing four of the top five leases in the Atlanta metro area, including American Honda Finance (86,976 square feet of Royal Center One) and Verint ( 63,000 square feet of 5995 Windward Parkway).
Metro Atlanta remains one of the healthiest office markets in the nation as more people return to their workplaces in greater numbers. Strong market fundamentals, a diverse talent base, and the continued influx of Fortune 500-caliber players announcing corporate expansions bode well for the future and should help mitigate any near-term uncertainty.
— By John Poulos, Executive Vice President and General Manager of Tenant Representation, SK Commercial Realty. This article originally appeared in the May 2022 issue of Southeast real estate company.