As Leases Keep Shrinking, Atlanta Office Vacancy Breaks Great Recession Record

It's been a dramatic fall from grace for Atlanta's office market.

A prolonged slowdown in office leasing activity has left the region’s 151.4M SF office footprint an all-time-record 23.7% vacant, surpassing the city's prior nadir of 23.6% set in the second quarter of 2011, according to CBRE.

Add in sublease space and space that companies have vacated while still under a lease, and CBRE reports more than 30% of Atlanta office stock was available at the end of the third quarter. And conditions are expected to worsen.

"Minimal tenant movement on the positive side is anticipated in the coming quarters,” CBRE Associate Field Research Director Scott Amoson wrote in a report. 

Savills Vice Chairman David Rubenstein, a nearly 35-year veteran of the office rep industry, said beyond the cloudy macroeconomic picture is a primary driver of why Atlanta offices continue to empty out: hybrid work.

“I don’t think I’ve seen a market quite like this. It’s even different than sort of the post-recession years primarily because of the challenge of getting employees into the workplace,” said Rubenstein, Savills' Atlanta market leader. “That was never an issue post-recession.”

Tenants emptied 424K SF more than they leased last quarter, a dynamic known as negative net absorption, which has totaled nearly 1.4M SF through the first nine months of the year, according to CBRE. Through the third quarter of 2022, companies absorbed 698K SF, according to CBRE.

Leasing activity slowed in the period, with companies inking 1.5M SF of leases, down from 2.1M SF in the second quarter and 1.9M SF in the first quarter, according to CBRE.

This year's 5.5M SF of activity is well off the pace from 2022, when total leasing activity for the first three quarters topped 8M SF. Despite the weakening conditions, average asking rents ticked up from $30.28 per SF in Q2 to $30.53.

"Though 52% of the deals inked were new leases, most of these tenants consolidated space," Amoson wrote. "Overall, activity decreased by 14% from Q2, and leasing in the urban markets cooled for a third consecutive quarter. Due to increasing rental rates, tenants may delay future leasing decisions until conditions improve."

Rubenstein said corporate executives continue to wrestle with just how much physical office space their companies need as they struggle to bring employees back to the office more frequently.

“You've got companies that are being more conservative on the space they take down just based on new and different ways of working. Everyone’s crystal ball is cloudy right now,” he said. “In a slowing economy, people have a harder time projecting what their business will be like. Even if their business is good, they’re not sure if their employees will be using the workplace.”

The largest new leases this past quarter included AT&T signing for 130K SF at Lenox Park, taking back a building it had previously vacated as it pushes more employees to come to the office, demonstrating that the uncertainty over hybrid work cuts both ways.

“A lot of these companies with leases coming up, they have to make a decision. They don’t want to sign a five-year lease,” Colliers Vice Chair Jodi Selvey said. "They don’t know if they’re downsizing or upsizing. They’re in flux."

Avison Young Market Intelligence Manager Sara Barnes said the overall uncertainty is pushing companies to delay leasing decisions.  

“Companies are still going back and forth [on remote work policies],” Barnes said. “Some still just can’t quite get there, which is why I think you’re not seeing a lot of the large-sized leases getting signed.”

First Key Homes also signed a 51K SF lease at Galleria 600 in the Cumberland/Galleria submarket, and Century Communities signed a 40K SF lease at 2325 Lakeview Parkway in Alpharetta, according to Savills.

But an increasing share of leases signed are smaller than 5K SF, with tenants moving into pre-built spec suites.

Thirty-two percent of leases signed in the past 12 months were between 2K SF and 5K SF, up from 23% in the same period in 2022, according to Avison Young.

Those spaces have become far more competitive than large blocks. Selvey said she is having difficulty finding a sublease for a 3K SF client.

“Now, if I want 20K to 50K or 60K SF subleases, I can find them all day long and twice on Sunday in Central Perimeter,” she said, adding that the demand for small spaces has “created its own little submarket.”

“The landlords that continue to put money into those spec suites are going to be the winners in this war,” she said.

An additional 800K SF of offices were put on the sublease market, bringing the sublease availability in the region to 9.9M SF as of the third quarter, the most in Metro Atlanta's history, according to CBRE.

Subleases added in the third quarter include Cox listing 216K SF at 6325 Peachtree Dunwoody Road; Flexport, which is shedding space around the world, listing its 74K SF office at Bank of America Plaza; and Varian Medical Systems putting 56K SF up for sublease at 3290 Northside Parkway near Buckhead, according to Avison Young.

Two of the largest leases signed this past quarter were renewals, according to CBRE: Benson Integrated Marketing Solutions, which inked 101K SF at 6195 Shiloh Road, and Arxada, which renewed 94K SF at Bluegrass Promenade, two suburban office complexes in North Fulton County. 

Companies facing expiring leases are more often choosing to renew where they are rather than incurring the expense of moving to a new building, especially given the continued inflated prices of many construction materials, Barnes said. 

"Renewals are still leading the way, especially on suburban properties," Barnes said. "Tenants know if they start to make some moves, it’s going to cost them."