Prime Rents Stall In Atlanta As More Vacant Trophy Space Comes Online

While owners and developers of Atlanta’s newest and freshest office towers are still attracting the bulk of tenant activity, their ability to raise rents may have hit its apex.

With vacancy in the 137M SF Class-A and trophy office market hitting another record in the third quarter at 28.9%, according to Avison Young, even the owners of the most desirable spaces are having trouble getting top dollar.

“What I’m seeing is tenants would rather go into a renovated, older building — call it post-2000 — that has been renovated and updated than pay the Class-AA trophy [rents],” said Heather Lamb, a senior vice president at Highwoods Properties, the third-largest owner of office space in Metro Atlanta.

To land tenants, developers are handing out large tenant improvement packages and periods of free rent.

“They’re likely higher than what they pro forma-ed,” Lamb said. 

Class-A office rents in Metro Atlanta remained flat year-over-year in Q3 at more than $33 per SF, according to Colliers' third-quarter report. But Class-A rents in the prime central business district submarkets of Downtown, Midtown and Buckhead fell by nearly 50 cents to $37.08 per SF.

“It’s definitely that $37 mark. It’s not really changing quarter over quarter,” Avison Young Market Intelligence Analyst Haley Leek said. “I think we’re definitely leveled out where rates are.”

While the amount of shiny new office buildings under construction has dwindled in Metro Atlanta, there is still 2.1M SF underway, more than 55% of which remains without any tenants, according to Colliers. Half of the office space built since 2022 remains vacant.

Two of Atlanta's biggest projects that are soon to come online are on track to deliver completely empty: 1050 Brickworks, a 225K SF creative office development by Sterling Bay and Asana Partners in West Midtown that’s set to deliver in the fourth quarter, and Portman Holdings' towering 538K SF Spring Quarter mixed-use tower in Midtown. 

Still, the trend of tenants fleeing to new or recently renovated office buildings in the city and the suburbs has only strengthened in recent years. 

Class-A landlords commanded nearly 70% of leasing activity in Q3, with absorption exceeding 500K SF for the first time since the third quarter of 2022, per Colliers. But on the year, absorption in the segment of the market is still negative 68K SF.

Over the third quarter, Morris Manning & Martin signed the largest deal, with plans to move from the embattled Atlanta Financial Center to Two Alliance Center.

“It’s a flight-to-quality issue. Do you have the appropriate amenities? Are you approximate to the amenities that are appropriate to your asset? If you’re in that condition, you're in a fair position to maintain rents or push them,” Gibraltar Capital Partners founder Keith Mack said. “I’d rather have a new building than an existing one.”

The flight to quality has helped developers of Atlanta's newest trophy properties keep rents high despite all the vacancy, partly fueled by rising construction costs. Trophy rents are up $5 per SF since 2020 to almost $45, a record, according to Avison Young. 

And despite the overall leasing malaise in Atlanta's office market, those record rents have not deterred tenants from paying them, Leek said. Most of the new buildings are in Midtown, which is still drawing tenants from across the city — engineering firm HNTB is moving to the new 14th + Spring tower in the submarket from its longtime downtown HQ.

“The companies looking to go there are so focused on location, they’re not going to be deterred by price,” Leek said. “If a tenant wants to be in those hot spots, the tenant will do what it takes because they want their employees to be happy.”

Landlords in the strongest financial health also have an edge in the competition for tenants, Lamb said.

“That’s a bigger driver today than almost any conversation,” Lamb said. “Tenants want to make sure the landlords can pay the tenant improvement dollars that are needed.”

The pipeline of tenant activity has picked up in Metro Atlanta, although it is still predominantly companies looking to switch from one building to another versus a new-to-market tenant.

That activity is being driven, market insiders say, by corporate C-Suites deciding on just how much space they need now that hybrid work schedules are largely cemented, with many companies drawing employees into the office at least three days a week. 

Companies that need 75K SF or more generally are downsizing by 15% to 20% from their previous office footprint, Lamb said. But tenants below 70K SF have been in expansion mode.

“We’re seeing expansion happening in that range where people gave back too much and they need more space, or they’re in growth mode,” she said. “That’s probably the most optimistic thing I’ve seen in the last six months.”