As construction begins on a 14-story office tower in West Midtown, its developers believe it will quickly attract tenants despite current economic headwinds and questions surrounding post-pandemic office demand.
Chicago-based real estate firm Sterling Bay and Charlotte-based developer Asana Partners broke ground this week on 1050 Brickworks, a 225,000-square-foot-office building off Marietta Street in Atlanta’s fast-changing Westside. Construction begins without any signed tenants, and comes amid economic uncertainty and fears of a recession.
The Federal Reserve is fighting inflation by hiking interest rates, which could tip the economy into recession. Job growth — a key driver of office space demand — remains strong in metro Atlanta, at least for now, though the rise of hybrid and remote work has created a cloudy picture for office owners. But commercial real estate experts say new buildings with more amenities are likely better equipped to adapt to work place changes than older towers.
Ryan Walsh, principal of acquisitions for Sterling Bay, said he doesn’t see a speculative office project, where no tenants are signed before development begins, as a risk. Instead, he called it an “imperative.”
“One of the key advantages a project can give itself is to go spec,” he told The Atlanta Journal-Constitution. “... We think you do the project right from inception and people will need the space and they’ll need it quickly.”
COVID-19 has upended corporate real estate decisions, with some companies scaling back. Office vacancy in metro Atlanta climbed to 17% in the third quarter, up from a low of roughly 13% before the pandemic, according to real estate service firm Colliers International.
Several new Atlanta office towers that were under construction when the pandemic started are opening. Some have tenants, others don’t, and competition among owners of new and existing office buildings is likely to intensify. From July to September, Atlanta reported its largest amount of new office space to open in any quarter since 2001, according to Colliers.
The firm’s analysts attributed the vacancy uptick to several large office developments — One Phipps Plaza, Fourth Ward and Midtown Union — which all have anchor tenants scheduled to move in over the next six months.
Graham Little, vice president of Colliers’ landlord services group, said its becoming more rare for developers to build completely speculative office projects, but he said West Midtown draws the type of demand that can support it.
“Microsoft’s commitment to that submarket has instilled a lot of confidence,” he said, referring to the tech giant’s forthcoming Grove Park campus. “Some of the projects that have been delivered (in West Midtown) over the past two years have seen some real success.”
Some other West Midtown projects, including The Interlock’s second phase and Echo Street West, are being built without leased tenants.
West Midtown and suburban markets are also faring better than downtown Atlanta, which has a vacancy rate close to 20%. In September, several towers within Peachtree Center, an iconic downtown office complex, were sold in foreclosure as vacancies increased and rental income was not sufficient to pay off loans backed by the buildings.
“It’s becoming more and more difficult to finance new construction, especially on a speculative basis,” Little said. “But I think if the developers are telling the right story and they have the right product in the right location, you’re seeing that developers are able to get buildings out of the ground on a speculative basis both in West Midtown and elsewhere.”
Located next to Asana’s Brickworks business park, 1050 Brickworks will include 14,000 square feet of street-level restaurants and retail below the new office space. The developers said the building’s amenities, such as a 10,200-square-feet outdoor deck, coupled with West Midtown’s burgeoning restaurant and entertainment scene will act as additional draws for prospective lessees.
Walsh called it an “experiential office environment.”
It’s a strategy used by many large mixed-use developers in the Atlanta area.
“If your office is in a place that when you step outside your front door and you’re standing in a surface parking lot in the suburbs, you’re dead,” Mark Toro, founder and principal of Toro Development Company, said last month during the National Association of Real Estate Editors conference. Toro’s company is developing Medley in Johns Creek, a $350 million project that will take a former suburban State Farm office campus and turn it into a mix of offices, retail, restaurants and residences.
The 1050 Brickworks tower is Sterling Bay’s first project in metro Atlanta, but the company’s executives said it won’t be their last.
“We’re looking forward to this project and the next one, because we do not like to go to a city and just do one project,” Keating Crown, managing principal with Sterling Bay, said during Monday’s groundbreaking ceremony.
Asana, which purchased the neighboring Brickworks adaptive reuse project last year for $80 million, has been expanding its Atlanta portfolio. The company owns the Krog Street Market food hall, the Plaza Theatre shopping plaza off Ponce de Leon Avenue and last week acquired the Plaza Fiesta retail center in Chamblee.
“We see this as a market that we want to continue growing in over time,” said Reed Kracke, a partner at Asana.
The developers expect to finish 1050 Brickworks by late 2024.
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