During the summer, metro Atlanta set a record for its vast amount of empty and unwanted office space.
It only took three months to break it.
Nearly 31% of all office square footage in metro Atlanta was available for rent at the end of September, according to data from real estate services firm CBRE. Not only does it top the previous financial quarter by nearly 2 percentage points, it signals an acceleration of office tenants trying to shed unwanted space.
“You have a lot of executives looking into their crystal ball and trying to figure out what their business is going to be like in 2024 or 2025, and it’s just very cloudy right now,” said David Rubenstein, vice chairman at Savills, who oversees the real estate services firm’s Atlanta operations.
The shadow of the COVID-19 pandemic continues to loom over the region’s office market, with companies years later still grappling with hybrid and remote work. In addition, high interest rates, construction costs and a tight refinancing market have further ramped up pressure on office landlords overseeing half-empty portfolios.
The various economic constraints leave companies with unused space scrambling to figure out how to fill their buildings — or get someone else to fill them instead.
Metro Atlanta’s vacancy rate has remained fairly steady throughout this year, varying between 23.7% and 23.9%, according to CBRE. The region continues to break records because of the rush of companies placing their unwanted offices on the sublease market, asking other companies to rent out their space at a discounted rate.
At the end of last year, about 7.7 million square feet of office was available for sublease. In the nine months since then, that figure has reached nearly 10 million square feet — enough space to fill the city’s tallest building, Bank of America Plaza, more than seven times.
Jeff Kelley, senior Vice President at Colliers Atlanta, said companies prefer shiny new buildings, a trend called “flight to quality.” That’s led trophy towers to soak up attention, while older and less desirable buildings linger on the sublease market with few takers.
“The higher-quality buildings are outperforming the rest of the market, and price is less significant,” he said. “They’re willing to pay more for it.”
Kelley said the doom and gloom around office markets across the country, including Atlanta, has given a false impression that every building is desperate for new tenants.
The average lease rate for top-quality buildings, referred to as Class A, was $32.83 per square foot in metro Atlanta, according to CBRE. That’s less than a 1% increase from this year’s second quarter, but companies continue to pay more for the most desirable buildings despite the region’s mounting office availability.
“There’s some subleases out there that’ll probably never get picked up because the space is not quality space,” Rubenstein said. “There’s just so many options to compete with.”
He added that when landlord concessions are factored in, which are freebees and perks offered to tenants to finalize lease deals, many areas of metro Atlanta are seeing effective rent prices decline.
The onset of the pandemic prompted a stark shift in the office market across the country. In Atlanta, the latter half of 2020 and beginning of 2021 saw negative absorption, a measure of how much the office rental market is expanding or contracting. For much of the past two years, metro Atlanta experienced positive absorption, but it has reversed course again this year.
The downward trend could be exacerbated if there’s an uptick in foreclosures, which is a possibility across commercial real estate given a wave of debt is set to come due before the end of 2025. The uncertainty clouds whether Atlanta’s record-breaking has reached its apex.
“I think the next 12 months are going to be telling,” Kelley said.
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