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Atlanta Office Sublease Supply Hits Record High

There is a 6.2M SF shadow looming over Metro Atlanta's office market, feeding into an air of uncertainty even as leasing activity rises 2M SF more than in the first half of 2021.

The city of Atlanta has seen an explosion of companies relocating to its confines in recent months.

Atlanta office tenants are offering 6.2M SF for sublease — leased office space that companies are not using and are actively attempting to offer to other companies, known colloquially in the industry as shadow space — up more than 22% from the second quarter of 2021, according to data from Avison Young. That amount of sublease space is a record for Metro Atlanta, said Sara Barnes, the firm's Southeast region lead for insight and innovation.

“It's still companies trying to figure out their return to office,” Barnes said.

Only 2.4M SF of that chunk is currently vacant, indicating companies are marketing excess space they may no longer need with remote work rather than trying to recoup money as they face distress.

“I don't think a lot of it is financial reasons,” Barnes said. “I think they're kind of testing the waters. If they can get someone to bite and take their space, that will help make their decision. But if they can't, then it will be, 'OK, we'll just figure something else out.'”

A rise in sublease space can have adverse effects on the office market, though Atlanta has demonstrated overall strength with a number of companies announcing plans to open new office locations in the city, adding coveted jobs to the local economy. The Metro Atlanta office vacancy rate continues to hover around 20% in the second quarter and leased but unused corporate office space can compete against the existing supply of empty office space, adding downward pressure to rents, a scenario that would cast a pall over the region's newest and upcoming office projects. Developers are building more than 4M SF of new office in Atlanta, two-thirds of which does not have any tenants pre-signed, according to Avison Young data.

“There is still a lot of uncertainty in the market, what the decision-makers' long-term goal is going to be for office space,” Pope & Land Real Estate Managing Director Jennifer Koontz said.

An upward trend in sublease space is sometimes read as an omen of potential corporate job cuts. Thus far, though, the local labor market continues to be tight. Atlanta's unemployment rate edged up to 2.6% this May from 2.4% a year before, but is still among the region's lowest levels and well below the national rate of 3.6%, according to the Georgia Department of Labor. The metro area added more than 170,000 new jobs in May from a year ago, with job numbers at all-time highs in the information, financial activities, education and health service sectors.

“Even though the labor force increased in all of our regions, counties, and metropolitan service areas, job postings continue to outpace those gains placing strain on employers to find talent for open positions,” Georgia Labor Commissioner Mark Butler said in a press release. “Many areas across our state are experiencing difficulty in filling many of the seasonal, temporary jobs normally filled with summer workers, due to the opportunities in full-time employment.”

While the labor department's list of companies planning job cuts — called Georgia's Worker Adjustment and Retraining Notification Guide — has been subdued in 2022 with 1,455 jobs cut from company payrolls, there have been a smattering of companies laying off workers, especially in the technology sector. Tech firms such as OneTrust, restaurant QR code operator Sunday, marketing tech firm Terminus and Sonar Software all made staffing cuts this year, Atlanta Inno reported.

T. Dallas Smith & Co. principal Cedric Matheny said many of his clients are becoming cautious about the number of square feet they will ultimately need for local offices, especially with rampant inflation adding to the worries that the U.S. is rapidly entering a recession.

“I think [the sublease supply] tells us companies are being cautious right now with their dollars,” Matheny said. “It's not a fear. It's just being cautious. I think we'll know more, obviously, in the fourth quarter.”

Koontz said some of her tenants are telling the firm they expect to downsize when they renegotiate lease terms, and though fear of a potential recession comes up now and then, primarily they are reacting to how hybrid and remote work will play into their staff structures.

Pope & Land Real Estate Managing Director Jennifer Koontz

“I think it is still, at least in the suburbs, 100% of the decision-makers want employees to be in the office. But they are having to work with appeasing their employees,” she said. “I have started asking if tenants are worried about the economy. That is only briefly entering the conversation with a few tenants. But on the whole, that is not a concern with most tenants. It's how their company will be moving forward.”

Despite the growing economic uncertainty, other office fundamentals remain strong in Metro Atlanta. Companies absorbed more than 887K SF in the second quarter, fueled by leases signed last year, according to JLL data. Some 400K SF of that absorption is credited to Google, which moved into its offices at Selig Enterprises' 1105 West Peachtree mixed-use project.

Leasing activity has also picked up across the market, according to Avison Young. Companies inked 5.3M SF in more than 400 office leases during the first half of 2022 compared to 3.3M SF in about 300 deals during the same period in 2021. And office landlords have been able to push asking rents, now up 2% to nearly $30.50 per SF metro-wide.

Companies are seeking more than 2M SF of new leases in Metro Atlanta during the second half of this year, according to a recent JLL report.

“While uncertainty has increased, the Atlanta office market is in a strong position for the next several quarters,” JLL Senior Research Analyst Austin Shealy wrote in the report.