“The office is dead” quickly became a cliche phrase after the COVID-19 pandemic ushered in the ability to work from home for scores of white-collar workers.
Now, nearly five years after the viral outbreak, real estate analysts and brokers say the modern office doesn’t just have a pulse — its heart rate is accelerating.
“A year ago, nothing was happening,” said David Rubenstein, a Savills vice chairman who oversees the real estate services firm’s Atlanta operations. “My assumption was it was all going to start happening in 2025 … but it’s happening now.”
The amount of unwanted office space — either empty or available to rent — declined slightly in the third quarter for the first time in three years, according to real estate services firm CBRE. Still, about a third of metro Atlanta’s office space remained available at the end of September, space that could take years to fill.
While only a small positive shift, real estate experts say it’s an early sign that increased optimism throughout the corporate workplace ecosystem is beginning to have an impact.
“We don’t talk about return-to-office anymore,” said Ellen Stern, senior vice president with CBRE’s advisory and transactions occupier group in Atlanta. “People are back (in the office) culturally in Atlanta.”
Metro Atlanta has experienced a stark uptick in leasing activity in 2024, especially large transactions. The average size of an office lease at the end of September was 60% larger than the average from the same time last year, according to real estate services firm Avison Young. By the end of the third quarter, at least 11 office leases of at least 100,000 square feet were signed this year, according to Savills.
Insurance giant American International Group, known as AIG, added another to that count last week by announcing an 180,000-square-foot lease signing at 2002 Summit Blvd. NE in Brookhaven. The firm said it’s consolidating its Atlanta area offices into a new innovation center, which will roughly triple its office footprint in the region.
Trying to course-correct
Most companies that have signed office deals after 2020′s pandemic shake-up have opted to do the opposite, shrinking their floor plans to account for more employees working from home.
Downsizing, in addition to companies increasingly trying to find another firm to sublease their unwanted space, has led to Atlanta’s office market racking up a string of poor report cards. For six of the past seven financial quarters, the region saw negative absorption, a measure of how much the office rental market is expanding or contracting, according to CBRE.
Chris Godfrey, principal of office leasing in Atlanta for Avison Young, said increased leasing activity could reverse that trend and assist with a market correction in the next few years.
“There’s a lot of energy in the market,” he said. “Deals have started to pick up pace a little bit. … There’s a lot of good momentum going into the end of the year.”
Avison Young’s Office Busyness Index, a tool that tracks office utilization in major markets, also shows Atlanta’s workforce has been swiping their badges into a physical workplace more often. The index bottomed out in April 2020 at about 10% but has climbed to about 60% by the end of September, roughly keeping pace with the rest of the country.
Whether by choice or through return-to-office mandates, Rubenstein said employers have now had the time to gain clarity on their workplace needs since 2020, which has spurred more confidence with lease signings.
“The market has stabilized to a point that they’re ready to make a meaningful commitment,” he said.
‘Musical chairs’
How full or empty an office building is reflects the state of the economy and is important for municipal and county governments and schools. Fuller office towers are worth more than emptier ones, which has an impact on tax collections. Workers in buildings also tend to patronize the businesses nearby.
Not all buildings garner the same attention from office prospects.
High-end offices, also called class A or trophy, have seen their average rental rates continue to increase even though there’s still a glut of available space to lease. Stern said it’s a continued case of “haves and have-nots,” where the most desirable buildings with owners that are flush with cash don’t have to fight for attention from potential tenants.
“If I’m representing a large tenant, it’s almost like a game of musical chairs,” Stern said. “There’s only so many buildings that they could fit in to where the landlord could perform.”
Those top-of-the-line buildings also won’t gain many new peers over the next few years. The lack of office demand coupled with increased interest rates have brought new office development to a halt across the Atlanta area. Only about 1.3 million square feet of office space was under construction at the end of the third quarter, according to CBRE. That figure was nearly 6.7 million square feet in early 2021.
“Because the capital markets have been so disrupted, there’s no new development going on,” Rubenstein said. “So over time, that vacant space will start to get absorbed.”
Some of that space will also likely be converted into other uses, such as hotels and residential. There also will be buildings with distressed loans that will likely go back to their lenders in the months and years ahead, meaning the pain is not over.
Thomas Taylor, senior manager of commercial real estate and commercial mortgage-backed securities at Trepp, said last week during a webinar on the state of the nationwide office market that the lowest-quality buildings account for the vast majority of distress.
Only about 8% of the country’s office stock currently faces loan distress, and he said their financial struggles and high vacancy skew the picture of the office market’s broader recovery. He added that the Federal Reserve’s decision to cut interest rates in September is a positive sign that more improvement could be on the horizon.
“One impact that decreasing interest rates … will have is ungumming the works,” he said. “A lot of folks have been waiting on the sidelines for lower rates.”
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