Cousins CEO: Sun Belt Office Is Healthy, But Rife With Obsolescence

Atlanta’s largest office landlord said it expects a wave of office conversions or redevelopments in the next few years as vintage office buildings become obsolete.

Landlords who own buildings erected before the 1990s will lose out in the competition for tenants as they gravitate toward newer space, Cousins Properties CEO Colin Connolly said during a Feb. 10 earnings call.

Connolly said 10% to 20% of Atlanta’s office inventory was built in the 1970s and 1980s and he believes those properties are ripe for redevelopment.

“There is little to no leasing demand or capital available for older vintage, lower-quality office properties,” Connolly said. “As a result, the values of these properties will likely reprice to facilitate a repurposing or even a teardown. These types of buildings will likely stagnate and have a reduced impact on the overall office market.”

The total universe of office space in Metro Atlanta exceeds 176M SF, according to a 2022 year-end report by JLL. Of that, more than 48M SF is considered Class-B or lower-quality space, which means as much as 9.6M SF of office is facing obsolescence in Metro Atlanta by Connolly’s estimates.

It will take time to work through repurposing or demolishing that product, Connolly said, but he said they have lost their relevance and will be removed from the inventory one way or another in the coming years.

Atlanta’s office market has fared well despite rising interest rates and a spate of companies pushing their office inventory onto the sublease market. In the fourth quarter, office tenants absorbed 485K SF — among the highest absorption of any single market in the nation, according to Cushman & Wakefield. For all of 2022, companies absorbed more than 1.1M SF of office space throughout Metro Atlanta, up from a total of 126K SF a year before, according to CBRE. 

Avison Young principal Kirk Rich said he agrees with Connolly’s assessment, especially in an environment where there is a power struggle between the C-suite and workers on getting back to the office. Companies are increasingly relying on newer office properties as a lure to get their workers to report back to the office regularly.

“Office has to be very experiential to satisfy recruiting efforts. Recruiting is everything now,” Rich said. And for vintage office properties, “just the way they were initially designed structurally, they just don’t have the area to amenitize.”

Cousins inked just under 2M SF of leases last year, with 83% of that activity in Houston and Atlanta, Cousins Executive Vice President Richard Hickson said on the earnings call. The firm signed 92K SF of leases across Metro Atlanta in the last quarter of the year, Hickson said. 

Executives with Piedmont Office Realty Trust — one of Atlanta’s 10 largest office landlords — also said on an earnings call that activity in the Sun Belt markets remains strong despite the slowdown, but particularly among smaller office tenants.

Atlanta was its busiest market for leases last year, and two-thirds of its lease activity was in Atlanta and Dallas combined, Piedmont CEO Brent Smith said on the Feb. 9 earnings call. He said the company’s leasing pipeline is healthy, and it has already closed 230K SF of leases in 2023, 100K SF of which was for new tenants.

“The majority of our absorption over the last two years has come from small businesses seeking less than 15K SF,” Smith said. “In fact, transition volumes from this customer segment are up 60% versus pre-pandemic levels.”

Smith said the past two years were strong for Piedmont’s Atlanta portfolio, especially at its Atlanta Galleria Office Park in Cumberland/Galleria where it leased 400K SF in 50 new deals and at 999 Peachtree, where the firm captured 129K SF in leases with rents rising 10%.

But many office experts say the level of activity among prospective tenants won’t be the same this year, especially as tenants reduce their footprint amid a solidifying of hybrid work policies and a spate of large tech companies cutting their worker headcounts across the country. 

While Atlanta has yet to feel the brunt of major corporate layoffs in the tech industry, Microsoft did confirm this month that it is pausing development plans on a new office campus on Atlanta’s Westside because of deteriorating economic conditions.