Atlanta Office Vacancy Eclipses 28%, Setting New All-Time Record
There has never before been this much empty office space in Atlanta.
Metro Atlanta's 173.5M SF office market is 28.2% vacant, according to brokerage firm Savills, the highest number it has tracked since it started researching the region in 2005. The figure, which only tracks direct vacancy, is 26.5% higher than at this point last year.
The direct vacancy rate doesn’t take into account the metro area’s sublease supply, which is also at an all-time high of 8.7M SF, a more than 40% increase year-over-year, according to Savills.
Combined, the direct and sublease space looking for a tenant in Atlanta eclipsed 50M SF in the second quarter. By contrast, all of Nashville has less than 48M SF of office space, according to JLL.
Atlanta’s office fundamentals today are a stark contrast to six months ago. In 2022, companies absorbed 1.1M SF, up from 126K SF in 2021, and Class-A rents rose by over 4% despite the rising concern about how corporate layoffs and hybrid work schedules would impact corporate space demand.
Leasing activity slowed to 1.6M SF in the quarter, up from the first quarter but down from 2.2M SF a year ago, per Savills.
“It’s a tough market right now for office space,” T. Dallas Smith & Co. Vice President Cedric Matheny said. “We have a lot of companies right now we’re talking to that are just trying to figure out how much space they need.”
Deloitte signed the largest lease in the second quarter, taking 72K SF at Promenade II. Even though it was the biggest lease in the period, Deloitte’s move from 191 Peachtree Tower saw it scale back its office footprint by half.
Other big leases executed in the past three months include OneDigital Financial Services securing 71K SF at Galleria 300, Ernst & Young renewing 45K SF at 1105 Lakewood Parkway in Alpharetta and the Transportation Security Administration taking 44K SF at 1500 Centre Parkway in Camp Creek.
Despite the deteriorating office market, landlords haven’t budged on asking rents, which increased half a basis point year-over-year to $30.85 per SF in the second quarter, according to Savills.
Pope & Land Enterprises Managing Director Jennifer Koontz said landlords are offering more generous tenant improvement allowance packages and free rent instead of reducing their face rent.
"The rental rates need to stay where they are," Koontz said. "Construction pricing is still high so it takes more money to get tenants in."
Tenants remain mired in a cauldron of uncertainty. While no official recession has been declared, banks have pulled back from commercial real estate lending after a series of interest rate hikes. And companies are still struggling to determine just how much space they will need with most corporate employees working from home at least part of the week.
“The biggest issue we’re seeing is tenants' inability to make timely decisions. Everything is moving so slowly,” Koontz said. “I don’t think lowering the rental rate or increasing free rent is going to make a difference. They either need the space or they don’t.”
The slowness is leading to painful decisions by office owners. Manulife US REIT is looking to sell off Phipps Tower in Buckhead as it tries to pay down mounting debts, a move an analyst called a "bitter pill to swallow." Blackstone is marketing the Three Ravinia Drive office tower and reportedly could fetch $175M after it last sold in 2016 for more than $210M.
