Office Demolitions Are On The Rise, Even Where It Was Recently 'Unimaginable'
Even office buildings constructed in the 21st century aren't safe from the wrecking ball.
As owners of commercial properties in Atlanta's suburbs grapple with anemic demand and values that have plummeted in recent years, many are coming to the realization that their buildings — even those that haven't yet celebrated their 25th birthday — are worth no more than the land they're built on.
In recent months, more and more buildings are being sold to developers who plan on tearing them down to make way for newer, more desirable commercial projects.
“I never thought I would see that, but that’s where we are in the cycle,” said Brian Granath, a partner with OA Development in Atlanta who owns a portfolio of suburban office buildings in Metro Atlanta. “There’s too much suburban office product.”
The increase in demolitions is a direct result of the suburban office development boom that kicked off in Atlanta in the mid-1990s.
The amount of office space in the Atlanta suburbs grew from 62.3M SF in 1996 to 96.2M SF in 2001 — expanding by more than 50% in just five years, according to Partners Real Estate data provided to Bisnow.
The deluge of development was driven by cheap land prices and corporate leaders wanting to be closer to their homes in affluent bedroom communities, especially North Fulton, Cobb and Gwinnett counties, Colliers Vice Chair Jodi Selvey said.
The northern suburbs “grew like weeds back in the late '80s and early '90s,” Selvey said.
“That’s where the tech went. Companies were like, ‘Hey there’s all these country club communities, the schools are good. Let’s move out there.’ That was the hotbed.”
But those office buildings have been emptying out. Between the first quarter of 2020 and Q3 2024, tenants gave back 3M SF in the Atlanta suburbs, driving vacancy over that period from 17.3% to 23% — an all-time high going back to 1987, according to Partners data.
While an office building’s life cycle can vary, most structures are designed to last 50 to 60 years before extensive renovations are needed. But life expectancy for these suburban buildings has diminished far faster than many expected.
Bridge Investment Group paid $41M in 2021 for the Brookside office park in Alpharetta, a two-building, 266K SF property in Alpharetta that was developed in 2000. It said in a press release at the time that its investment would benefit from “burgeoning demand in suburban office markets as companies put greater emphasis on flexibility, value and closer proximity to the homes of employees.”
That expected demand resurgence never came. Less than four years later, Bridge struck a deal to sell the property to Portman Holdings, which plans on tearing down one of the five-story office buildings and replacing it and surface parking with 350 apartments, 90 townhomes and 60K SF of retail.
“To me, it’s personal,” said Gregg Metcalf, a 34-year CRE veteran who developed the Brookside office complex with The Alter Group. “I built that office building in 2000. It delivered in 2000. We’re tearing it down in 2024.”
Metcalf said he understands why. Brookside has a sea of asphalt around it that will be improved with a mixed-use development. The office building that will remain will be more attractive with retail and residential space in walking distance.
“They’re eliminating something that nobody wants to go to anymore,” Metcalf said. “When we get out to the burbs, we’re going to see buildings scrapped. And we’re going to see mixed-use come up around existing buildings.”
Jeff Shaw, the CEO of Bridge Commercial Real Estate, declined to comment on Bridge's pending sale of the Brookside campus to Portman. But he said more office landlords across the country are facing the prospect that the land underneath their office buildings is now worth more to developers than the existing structures.
“There's always been buildings that, even in a good market, don’t lease or have struggled to lease,” Shaw said. “If you've got an asset that was already struggling in a tough market … if you want to monetize, you've got to look at alternative uses. We’ll see more and more teardowns of buildings.”
In the early days of the pandemic, some companies were looking to lease suburban office properties for a hub-and-spoke workplace model as an answer to how to operate once quarantines were eased, Colliers principal Dany Koe said.
Despite that initial push, corporate executives quickly realized that buildings where employees can't walk to lunch or other amenities weren't drawing leases, and an expected spike in suburban office demand never materialized, Koe said.
“It changed really quickly. They realized that’s not what employees wanted,” he said. “The last four years, this was extremely quick in the cycle.”
At the same time, the value of residential properties soared. Rents in the Atlanta region rose 41% from 2018 to 2023, according to census data. Home prices are up 67% over the past five years, according to the S&P CoreLogic Case-Shiller Home Price Index.
So unlike obsolete urban properties that are falling into distress because of a lack of capital, buyers are lining up for sites with land that can be turned into housing or mixed-use development.
“We’re selling office buildings at high-density residential land value. I never thought that would happen. It’s crazy, tearing down buildings that cost $400 per SF to rebuild,” said Transwestern Senior Managing Director Kevin Markwordt. “There’s a demand for the housing. If these counties and municipalities agreed to residential, you’d see a whole bunch get torn down. They wouldn't blink an eye. They’d tear the building down and put a townhouse farm on it.”
Homebuilder D.R. Horton purchased 3585 Engineering Drive, a four-story, 102K SF office building constructed in 1996 in Peachtree Corners, for $7.5M. The company is planning to raze it and use the acreage underneath to build 75 townhomes instead.
Apartment developer Terwilliger Pappas late last month purchased Embassy Row 100, a 115K SF mid-rise office building in Sandy Springs that delivered in 2000 and was the campus for the Art Institute of Atlanta before it shut down in 2023.
Terwilliger Pappas, known for its Solis-branded apartment projects throughout the region, plans to raze the building and instead use the 7.3 acres to build an apartment community. Shaw bought the building with partners, separate from his role at Bridge, in 2016 and sold it to the developer last month.
Terwilliger Pappas paid $18.25M for Embassy Row 100, according to the real estate transaction tracking firm Databank, a slight haircut from the $20M its previous owners paid.
When the partners purchased the building in 2016, Shaw thought it would always be the home for the Art Institute. But when the school shuttered, he realized the 23-year-old building might not have a future.
“It’s a beautiful building, but really, the highest and best use is to change its use, since it’s right on the highway,” Shaw said. “When you started looking at the cost of retenanting the building and the removal of all the improvements and plus free rent and where rents are at the time for that age of product, it started to make more sense to shift to redevelopment.”
Much of the upheaval locally has been centered in the Central Perimeter area, which includes Dunwoody, Sandy Springs and Brookhaven.
“We are excited about the opportunity to see some redevelopment in the Perimeter area, which probably four years ago would have been unimaginable,” Dunwoody Mayor Lynn Deutsch said.
Granath said OA is considering tearing down one of its own buildings, a suburban office built in the 1990s that he declined to identify. The firm has been attempting to lease up the office but has encountered sluggish demand. Granath said the firm is coming to the realization that it may be better to redevelop the project, assuming it can convince the local government to rezone the land to allow for residential.
“Does the building remain office or does the site needs to be repurposed?” Granath said. “Basically it’s a math problem in terms of what the value of the land for office is or if we need to invest in the building. And then what is the local municipality’s willingness to work with us to rezone the asset?”
That question is already proving to be a sticking point. Cities are cognizant that office and commercial development bring in more bang for the buck than residential. Their tax revenue doesn't come with added burden on schools and municipal resources.
In 2021, Alliance Residential tore down a 1980s office building in Peachtree Corners for a new apartment complex that opened in early 2024. The city then enacted a moratorium in May on new residential and mixed-use proposals “in order to assess our current inventory and determine how best to stabilize and enhance our office stock,” Peachtree Corners Mayor Mike Mason said in an email to Bisnow.
Peachtree Corners doesn't assess any property taxes, instead drawing a large percentage of city revenue from business taxes and licensing fees. A rapid shrinkage of space where businesses can operate could affect the city's finances.
“While some rightsizing of office stock is likely to take place, the goal is to minimize the loss of office stock and promote reinvestment into our Central Business District, which is the hub of our economic activity and the reason why we continue to enjoy a zero millage rate,” Mason said.