Uncertainty Among Small Companies Plaguing Atlanta's Office Market

Roadie, a last-mile delivery platform, has had its headquarters in a 7K SF Buckhead office since 2014, but when its lease expired Friday, rather than renew or relocate, the company made the decision that commercial landlords have been dreading since the pandemic set in: It decided it doesn't need an office, at least for now. 

Roadie CEO Marc Gorlin and the leadership team decided to keep the company's more than 100 employees working from home for the foreseeable future, a spokesperson confirmed to Bisnow.

“We're going to wait until we know a little more about what our needs are going to be like, what the world is going to be like,” spokesperson Heather Hughes said. “The world just seems so fluid right now, so we won't be moving in anywhere new.”

Roadie is one of thousands of small and midsized companies wrestling with just how much office space they will need in a world where some portion of employees will likely be working from home at least part of the time. As the world emerges from the coronavirus pandemic, this leasing existential crisis among small companies that dominate the pipeline of pending office deals will only add to the malaise landlords are facing as office absorption tanks.

“The smaller companies are really having a lot of hesitancy,” T. Dallas Smith Commercial Real Estate Advisor Nick Winbush said. “I've talked to a number of my clients who are considering whether to even come back to the office.”

In the first three months of the year, Atlanta office tenants gave back 2.8M SF more space than they occupied, the worst single quarter in the metro area's history, according to Colliers. Across the past three quarters, the Atlanta office market has seen nearly 5M SF of negative net absorption.

Much of the hit office landlords took this past quarter was expected, a result of companies executing long-planned consolidations. Those tenants include Cricket Wireless emptying nearly 1M SF at Lindberg City Center, Georgia Pacific consolidating its headquarters in Downtown Atlanta and the continued consolidation of State Farm into its new corporate campus in Central Perimeter.

But the uncertainty plaguing office tenants will likely keep the area's  office absorption in the red for the rest of the year, experts say.

“At the end of the day, over the next 24 months, it's going to be a net negative to the market,” Lincoln Property Co. Southeast Executive Vice President Tony Bartlett said. “I don't think we'll see what happened in [the] first quarter repeat itself [in the] second, third and fourth. But I think definitely we're going to wade through some choppy waters.”

There are some 3M SF of leases set to expire in the region this year, according to CoStar. Some of the biggest tenants with leases ending in 2021 include law firms Smith, Gambrell & Russell with 139K SF at Promenade II and Hall Booth Smith with 76,500 SF at One Ninety One Peachtree Tower, plus Sage North America with 68K SF at 271 17th St. in Atlantic Station and Pindrop Security with 59,500 SF at The Biltmore in Midtown, according to CoStar.

While larger companies tend to make the headlines, the leasing market is dominated by smaller firms. The average lease size expiring in 2021 is 6,250 SF, according to CoStar. Smaller companies tend to wait closer to the time their leases expire before making decisions, unlike larger companies, which tend to have more complex requirements, Transwestern Vice President of Research Keith Pierce said.

“[Small firms] can look six months out, and honestly, there's probably not much reason to look more than 12 months out,” Pierce said.

But that pipeline of activity won't likely help the market, as many small and midsized tenants look to consolidate their offices by as much as 20%, Joel & Granot Commercial Real Estate principal Alan Joel said.

“What we're seeing in our world, 8 out of 10 of our clients are contracting,” Joel said. “We've done a lot of one-year deals, and we'll continue to do one-year deals. They're kicking the can.”

Winbush said this work-from-home uncertainty plaguing the office market may be short-lived. Touring activity nationally is on the rise, according to a recent report by real estate software provider VTS, and as more companies commit to space, they will alleviate the indecision among the smaller tenants in the market, Winbush said.

“It's going to take a few big dogs to finally bring everybody back,” Winbush said. “Bigger clients are making commitments. It's a good time for them to make these commitments, too.”

Colliers and JLL noted in recent reports that activity is picking up, with Global Payments, ServiceMaster and the John Marshall Law School all inking new leases this quarter. And companies like Microsoft, Airbnb, Adecco and Google have announced plans for more space in Atlanta.

Bartlett said bigger companies are more set on inking long-term leases, while smaller companies remain “a little bit in neutral right now.”

“Of the projects that we have large blocks of space, we have more activity than the buildings where we have the smaller spaces,” Bartlett said.

While office absorption likely will not turn positive this year, few expect the first quarter's record loss to repeat itself again, especially given that some bigger companies will be moving into spaces that they leased over the previous year. Deluxe Corp., Google and Microsoft all plan to move into their new spaces later this year, guaranteeing at least 1.2M SF of occupancy gains, according to JLL.

“It's going to be a 12-month, 18-month recovery for office. And office is going to lag behind everything, even retail,” Joel said. “Atlanta is going to do fine. It's not going to be a bloodbath like people think it's going to be. We will recover.”

At some point, Roadie will likely re-establish a physical headquarters in Atlanta, its spokesperson, Hughes, said. The firm is working with Joel & Granot principal Dan Granot in its search.

But executives are in no rush to make that decision, especially with employees adept at working from home without a hit to corporate productivity, Hughes said.

“Productivity has been incredibly high,” she said. "2020 was a wildly successful year for us. Growth was 4x for us, and that was all while people were working from their kitchen tables."