New Office Construction Is On Pause In Atlanta. Landlords Have A Chance To Fill Their Towers
For the first time in 15 years, no new office projects over 100K SF were underway in Metro Atlanta.
A dearth of new construction, coupled with the demolition of some 3M SF of obsolete office buildings, is giving embattled office landlords breathing room to capture a pipeline of tenants scouting the market for space, according to a second-quarter CBRE office report.
Rockefeller Group’s completion of 1072 West Peachtree, the 60-story mixed-use tower in Midtown that includes 224K SF of trophy office, marked the last major office development to be completed in a cycle of projects that began in 2018, CBRE Associate Field Research Director Scott Amoson told Bisnow.
“Delivery of 1072 West Peachtree brings overall construction activity to zero square feet, a condition not seen since 2011,” he said in the report.
Given inflated construction costs, new development is likely on pause unless a major tenant committed to sizeable office space that would justify breaking ground, Amoson said.
That pause is a welcome development for an office market still wallowing in near-record vacancy rates, Trinity Partners Director Cori Nuttall said. While overall availability in the second quarter dropped by 1M SF from the previous quarter, the metro area's office vacancy rate still topped 30%, according to CBRE.
“It can only be a positive to have a lack of construction,” Nuttall said, adding that it will give landlords of Class-A and trophy office towers a chance to secure new tenants.
“It’s a rising tide that raises all ships,” she said. “I don’t think [new construction] is going to happen for a couple more years as things stabilize.”
Some developers have proposed sites in Atlanta for the next new office towers. Crescent Communities has plans for a 21-story, 350K SF tower at 3600 Peachtree Road in Buckhead, Bisnow previously reported. Earlier this year, Cousins Properties CEO Colin Connolly said the Buckhead office market is ripening for a potential new office building.
Positive Momentum But Plenty Of Vacancies
In the second quarter, Atlanta landlords experienced one of the strongest surges in office leasing activity in years. The area's office market has been improving following the pandemic's disruption, but there's still more recovery to go.
Companies occupied 543K SF more office space than they vacated in the second quarter, the highest gain since 2022, according to CBRE. Total leasing jumped more than 11% this past quarter, topping 1.4M SF. Tenants continued to focus on prime office space, mainly in Buckhead, Central Perimeter and North Fulton, according to Colliers.
Pinnacle Financial’s 165K SF lease at Portman Holdings’ Ten Twenty Spring office tower in Midtown was the largest deal in the second quarter, according to CBRE, followed by law firm Baker & Hostetler’s 88K SF renewal at 1170 Peachtree in Midtown, according to Savills.
The list of new office buildings that rose during this past real estate cycle is extensive, but not all projects were a home run for their builders. For every Midtown Union, which snagged financial services firm Invesco, and T3 Atlantic Station, which secured Microsoft, other new buildings in the metro area experienced extended vacancies.
Lincoln Property Co. struggled to lease its Echo Street West project, a 275K SF steel-and-timber-framed office building in West Midtown, after opening in 2023. By the end of 2024, Lincoln sold the empty five-story office building to California-based Menlo Equities.
The building traded around the low $200-per-SF price, a discount to its $450-per-SF price tag.
And Asana Partners and Sterling Bay handed back the keys to 1050 Brickworks, a 14-story speculative office project in West Midtown, to its lender Bank OZK for $45.7M, The Atlanta Journal-Constitution reported. The Arkansas-based bank previously gave the developers an $85.5M loan for the project as the building remained empty.
James Pitts, founder of office tenant rep firm Greenwood Commercial Real Estate Group, said projects like 1050 Brickworks are victims of the continuing uncertainty plaguing companies and their office footprint decisions, especially as many companies assess the impact that artificial intelligence may have on their workforce.
“People are still trying to sort out what they’re going to do, and their workforce,” Pitts said. “Our big clients are looking for shorter lease terms. They’re more often downsizing, but they want flexibility to grow.”
Unwilling Lenders
Corporate uncertainty, coupled with continued economic and geopolitical angst, means it will be harder for developers to convince companies to commit to a large block of space on an office building that is still on the drawing board.
“I do think that we have a lot of frothiness in the world economy right now with Iran and various other tariffs,” Pitts said. He added that no new office building will likely break ground in the near future “unless you have a tenant in hand, or you’re just sitting on a whole bunch of money that is really, really patient capital.”
Colliers Vice Chair Jodi Selvey said the lack of new development is driven mainly by lenders unwilling to shell out loans to developers for chancy new office projects.
The rent needed to justify a new building is also a high hurdle, one that will likely take time to overcome before a bank or lender will provide financing for a new skyscraper.
Amoson said a tenant would need to be willing to pay $90 per SF for new office digs in Metro Atlanta. While rents have risen over the past three years — up 8% to nearly $34 per SF as of the second quarter — they still have not achieved a level to justify new construction. According to Colliers, even the very top rents in Metro Atlanta, generally hovering around $60 per SF, still fall short.
“The lenders weren’t lending. And they’re still not going to lend unless there’s a very large prelease. That’s one of the other reasons buildings have not kicked off,” Selvey said. “If no one is willing to do it, everyone is going to sit tight for a while, and everything is going to get more expensive.”
