Landlord Gifts Help Fuel Atlanta Office Leasing Boom

The pace of companies taking over office space has accelerated in recent months, with tenants snapping up deals from landlords in the hope of standing out in a market that continues to see record vacancy levels.

Atlanta Skyline in 2021

According to a report from Savills, companies leased 2.6 million square feet in the second quarter, the highest level since the first quarter of 2019. Leasing activity jumped 63% from a year earlier and was up from the 2.4 million square feet of leases signed in the first quarter.

Office tenants have been incentivized to agree to agreements as they gain more clarity on their updated office footprint needs in a hybrid work world.

“It’s a sign that business is going well and companies are making real estate decisions,” said Cedric Matheny, a principal at T. Dallas Smith & Co. “They’ve done all the right-sizing work.”

But they also find great deals when landlords rush to snap up leases.

It is becoming increasingly common for landlords to offer one month of free rent for each year of a lease, brokers said. Bisnowa huge jump from the two-month flat rate, regardless of lease length, in effect more than a year ago.

According to Matheny, some landlords are even agreeing to provide 1.5 months of free rent per year to large companies that rent a large space, or 15 months of free rent on a 10-year lease.

“We get what we ask for in free rent,” Matheny said.

Landlords are digging deep into their pockets to fund improvements, which is helping them close deals that are weighing on their bottom lines. Improvement fees for leased premises averaged $115 to $120 per square foot in the second quarter, up from $70 to $100 per square foot two years ago, according to Savills.

“TI packages have to be incredibly heavy, which is really hard to digest in Atlanta,” said Kirk Rich, principal at Avison Young. “Inflation puts them on par with other urban markets across the country.”

These booming IT packages allow landlords to keep their headline rents high, and with new office buildings coming onto the market with plenty of available space, asking rents have increased.

Asking rents reached $32.61 per square foot in the second quarter, up more than 5% from a year earlier, and buildings in the central business district now exceed $40 per square foot in average asking rent, according to Savills.

Leasing in the second quarter didn’t impact the fortunes of metro Atlanta office landlords. According to Cushman & Wakefield, more than 1 million square feet of office space came back onto the market in the first half of the year. Savills reported that available sublease space increased by 500,000 square feet from a year earlier, for a total of 8.7 million square feet in the second quarter.

Developers are building 1.3 million square feet of new office space, though some new buildings are struggling to find tenants.

The combined headwinds pushed the overall vacancy rate to 25% across the metro and nearly 30% in Atlanta’s top office markets of Buckhead, Midtown and Downtown, Cushman & Wakefield reported.

Although tenant activity has improved, Atlanta’s economy continues to see a decline in the types of jobs that are typically housed in offices.

While nonfarm payrolls have increased since the 2020 crash, from 2.5 million in the region in May 2020 to nearly 3.1 million in May of this year, nonfarm office jobs have continued to contract every quarter metro-wide since the middle of last year, according to Savills, citing Federal Reserve data.

“I don’t expect leasing activity to increase every quarter,” said Ally Juratovac, an associate researcher at Savills in Atlanta and the report’s author. “I think a lot of them are downsizing. The tech sector is definitely downsizing.”

According to Savills, most of the top ten office transactions of the quarter were either renewals or companies relocating their local offices to other buildings.

Southern Company Gas signed its largest deal of the year so far, taking 260,000 square feet at Midtown Center II with plans to leave a similar-sized footprint at 10 Peachtree Place. Newell Brands also announced plans to move its headquarters to the Queen Building at the Concourse Corporate Center, and Piedmont Healthcare is reducing its office footprint as it moves its Cobb County headquarters to 164,000 square feet at Atlantic Station, according to Savills.

While AT&T signed a combined 200,000 square feet of space during the quarter, the telecom giant also regained space in two Buckhead office buildings it had emptied years earlier.

No tech company cracked the top 10 last quarter, a far cry from the demand the sector has seen for office space, particularly in Midtown, in recent years.

While the biggest deals have been moves within the city, Rich said it’s a sign that larger companies are finally making decisions about how much space they need to entice their employees to return to the office more often. Larger users signing leases is encouraging smaller companies to become more active in the office market, Rich said.

“It all starts with restoring the culture that existed before the pandemic,” he said. “Yes, those numbers have been skewed by big deals. I don’t think that’s a negative.”

Given the difficulties facing office landlords in the debt market, particularly those with loans maturing soon, not all can compete for large leases.

Those that can might lay off smaller tenants or those signing shorter-term contracts to avoid pumping more capital into a building, said Kirk Demetrops, a partner at MidCity Real Estate Partners.

“Homeowners who can afford it will play the current market, which is characterized by high interest rates and concessions,” Demetrops said. “But some won’t either, because every dollar invested may not be recouped.”