Big Companies Driving The Downsizing Trend In Atlanta
Hybrid and remote work is taking a bigger bite out of the office market as more companies lock in long-term leases with fewer square feet than before.
The majority of the companies shopping for office space in the Atlanta market are looking to downsize after implementing hybrid and remote work arrangements despite a push to come back to the office, office experts said during Bisnow's Atlanta Office Market Outlook event at Uptown Atlanta this week.
“It's the larger [companies] ... who are scaling back when they're renewing. They're not necessarily vacating, but they're downsizing significantly,” OA Development partner Brian Granath said. “It's the larger tenants where the boss is three time zones away ... is where they say two days a week is fine.”
CBRE First Vice President Sabrina Gibson said corporate America's downsizing will most impact submarkets like Central Perimeter, which has been a preferred destination for Fortune 500 companies. For instance, insurance company Zurich North America recently downsized its office from 90K SF to 30K SF at Perimeter Summit in Central Perimeter as the company cements a hybrid work policy, Gibson said.
“The impact of the pandemic and how it changed how companies use office space, it doesn't just go away overnight because tenants have long-term lease commitments,” Gibson said. “So those leases are going to continue to roll for the next seven to 10 years, and we're going to feel the impact of those in each submarket.”
More than 10M SF in office leases are expiring throughout Metro Atlanta between now and the end of 2023, according to Avison Young, citing data from CoStar. That space is coming open as activity in the office market has been slowing in recent months due to economic uncertainty, panelists said.
T. Dallas Smith & Co. President Leonte Benton said one of his clients, which opened its first office in Atlanta two years ago on a short-term lease, is "still trying to get their arms wrapped around what capacity looks like. Unfortunately, it's kind of all over the place."
Benton said many employees still prefer to work from home, which is confounding corporate executives as they wrestle with just how much square footage they actually need.
"From the research I've done, just about every employee who is offered to work remotely takes it," he said. “It's so squiggly right now that no one has a direct answer."
The consolidation trend isn't showing up in Metro Atlanta's office fundamentals just yet.
Tenants absorbed nearly 600K SF during the first half of 2022, according to Colliers data. Absorption looks on track to remain positive in the third quarter of this year, Sara Barnes, Avison Young's Southeast region lead for insight and innovation, told Bisnow in an interview.
But absorption is a backward-looking statistic. The leasing decisions companies make today won't be reflected in the numbers until they actually make their move.
“I believe this quarter will see positive office absorption due in large part to Mailchimp moving into their new building as well as Cisco moving into their space at Coda,” Barnes said. “In terms of leasing, I would say the volume has slowed, which is pretty normal for the summer months, but we aren’t seeing the large-size deals that we have in the past.”
The area's office market is still being weighed down by a deluge of sublease space as companies attempt to pawn off their unused portions of the office on other tenants, often at a discount. According to Avison Young, Atlanta office tenants were offering 6.2M SF for sublease as of Q2, up 22% from the first quarter.
“I think companies are contracting their space right now partly due to return-to-office efforts, however, I think inflation and rising rates are playing a part as well,” Barnes said. "Companies are hesitant to make any big decisions as talks of a recession continue and not knowing how mild or severe it may be."
Coworking and flex spaces have become a common requirement in tenant requests for proposals as they shop for office space, Industrious Senior Director of Real Estate Growth Peri Demestihas said. Operators like Industrious work closely with office landlords to design spaces that will help tenants encourage employees to want to come back to the office, he said.
“You look at our space and there are people on a couch or on a patio and they're working. They have an office. They have a home they could go to. They have a door that closes. They are just choosing to be out in the amenities because the amenities are attractive to them,” Demestihas said. "It breaks up their day and the monotony. The buildings that do that very well, yes, that's a huge flight to quality."
Lenders also are starting to value flex office and coworking spaces in buildings as necessary amenities, Demestihas said.
“I joke about the coworking word because it has a very negative connotation. It has a connotation of a bunch of bros in flip-flops sitting in a cafeteria-style table, and that's not what flex office is,” he said, adding that flex space is becoming an amenity “that makes [tenants] sign a 60K SF lease just like the gym did, just like the food hall did.”
“I think when that happens that is going to change the way the industry looks at this space, especially as it gets to valuation especially as it gets to underwriting,” Demestihas said. “It's not just tenancy anymore. It's part of your building plan altogether.”
“I just finished another space where we built all these spaces that were expected to be popularized and bring people back,” Fownes said. "And it didn't work. I hate to say that."
Fownes was especially critical of hot desks and unassigned seating in offices as some companies forgo personal space for their employees.
“I think one of the things that is hopefully is kind of going away is this idea that if you have all these hot desks and unassigned spaces, actually those are the most disengaged employees. The most disengaged. And what that means is grossly unproductive people if they become disengaged,” she said. “The old space that has none of these fun cool spaces in them, the people are still coming there. That's not to say we don't want to create cool new spaces, but that's not bringing people back.”