One word to describe Atlanta’s commercial real estate scene in 2023 is “transition.” challenging. A heart-warming feeling.
But what word best describes a year defined above all by the highest interest rates in decades? Purgatory, said Norm Radow, founder of RADCO Cos.
“Sellers know they’re going to go to hell, but they’re waiting to see what happens and putting it off,” Rado said.
This year saw signs of hope for offices as MARTA signed a 130,000 SF lease in Uptown Atlanta, expanding into space previously occupied by AT&T. AT&T regained some hope in the back-to-office trend when it leased his 120,000 SF at 1277 Lenox Park Blvd. The building was previously occupied, but was vacated when a telecommunications giant consolidated its office space in Buckhead.
While the office market was softening in 2022, metro boosters felt financially well placed to take advantage of the immigration trends that have benefited Atlanta and other Sunbelt metropolitan areas.
Then Microsoft made an incident.
The tech giant announced in February that it was canceling plans to develop a 90-acre corporate campus on Atlanta’s West Side. The project sparked a redevelopment boom in the area when it was announced in 2021.
Local officials and residents were shocked by the setbacks and expressed concern that redevelopment momentum would slow and that many promises for Microsoft’s project, including affordable housing, would never materialize.
Microsoft is just the beginning of an expected series of projects, and Office has been discontinued.
Plans have been announced to build a large office campus in 2021 on part of the site owned by Microsoft.
In April, Carvana withdrew plans to sublease 570,000 SF from State Farm at Park Center Building 1 in the Central Perimeter. Twitter, then known as Twitter, pulled out of a lease for more than 40,000 SF in Ponce City Market in May. Ponce City Market paid some of the highest rents in the city. NCR has listed 864 Spring St., one of its two new 14-story headquarters towers, on the sublease market.
“It’s been a good year, but it’s been a tough year,” said David Rubenstein, market leader at Savills in Atlanta. “Every deal was tough.”
John Boyd, president of corporate location consulting firm The Boyd Company, said the backlash was concentrated in Atlanta’s technology sector, which has been squeezed by soaring interest rates and less venture capital funding.
“Technology companies were well-funded until this economic slowdown,” Boyd said. “When they go into cost-cutting mode, it has a ripple effect.”
Rod Mullis, a managing member of Windsor Stevens Holdings, which is developing an apartment project not far from Microsoft’s stalled campus, said the failure of the Silicon Valley bank will particularly impact Atlanta’s high-tech industry, making it a prime source of financing. He said that he was cut off.
“The VC community is reeling right now,” Mullis said. “The state of the startup community is bad. We have a lot of zombie technology companies.”
As the region’s estimated $625 million in office loans mature in 2023, technology setbacks are shrinking the office market and putting increased focus on landlords and their ability to hold on to their properties, Trepp said. It is said that there is
A sudden rise in interest rates of 11 times over the past two years has made mortgage repayments more expensive, even if homeowners are able to find a lender. That led to some notable moments of distress.
General Electric Pension Trust and State Street Global Advisors lost the Central Perimeter office building that had served as AutoTrader’s headquarters to Wells Fargo, and several smaller buildings were sold by lenders. is facing a foreclosure lawsuit.
With limited financing conditions, the struggle is not limited to offices. The Sheraton Hotel Atlanta and W Atlanta Downtown have been turned over to lenders, and the Sandy Springs apartment complex is also on the verge of being auctioned off.
Even Olympia Heights Management, a New York-based developer that had long planned to develop the Southeast’s tallest residential tower in the heart of Midtown Atlanta, lost ground last month when Benmark Capital foreclosed on the prominent property. It lost control of its property at 98 14th Street.
“No matter how early [the Federal Reserve cuts rates], the fact is that we over-valued in 2020 and 2021 and the Pied Piper will have to pay a price,” Rado said. “This is not just a capital market issue. Rent is also under pressure. Concessions are being made. Delinquency rates are at an all-time high. You can’t kick anyone out. Premiums are very high.”
Bisnow/Jared Schenke
Rod Maris, partner at Windsor Stevens
The hopes of many developers, fueled by unsustainable growth in 2021, also fell to the ground this year.
Tishman Speyer has scrapped plans for a $700 million office and apartment complex in West Midtown, the Atlanta Business Chronicle reported. Newport RE halted redevelopment work in south downtown as investors balked at funding the ambitious project further, forcing a string of properties into foreclosure. Atlanta Ventures is considering buying the portfolio, and an auction was recently averted, ABC reported.
Portman has scaled back plans to redevelop three buildings, including new office space, along Ponce de Leon Avenue across from Ponce City Market.
“Financial markets are tight right now. It’s a long way off for any financial institution,” Mike Green, Portman’s vice president of development, told the Atlanta Journal-Constitution in August.
Financial institutions’ sentiment is not buoyed by data fundamentals. Metro Atlanta’s office market started setting records for all the wrong reasons this year, with vacancy rates hitting an all-time high of 23.7% in the third quarter and companies subleasing more unused office space than ever before. is provided to.
Avison Young Principal Kirk Rich said these indicators are a sign of the larger disruption hitting the office industry. Exactly how much office space will a company need if employees continue to work from home at least part of the time?
“It was the year I thought it would happen.” [see employees] I thought once I got back to work, I would have clarity about my debt,” Rich said. “But both still don’t work.”
A number of large office leases signed in 2023 reflect the rise in small footprint hybrid work. Deloitte will cut its office space in half with a move from 191 Peachtree Street to Promenade Tower in Midtown, and General Electric’s GE Vernova division will gain office space with a new lease at 600 Galleria Parkway in Cobb County. Reduced by 70%.
Courtesy of Kirk Rich
Avison Young Principal Kirk Rich
Rich said corporate leaders are still grappling with office space, forcing landlords to be more flexible when it comes to renewing existing tenants.
“Before the pandemic, you either renewed for three, five or seven years, or you didn’t,” Rich said. “You’d tell them to go hiking. You wouldn’t do that now. Everything has changed.”
While metropolitan areas and the U.S. economy have so far avoided recession, the uncertainty reflected in the office market, which tends to be filled with high-paying jobs, is reflected in polarized economic data. said Rajeev Dhawan, director of the Center for Economic Forecasting. Georgia State University’s J. Mack Robinson College of Business said in a recent report:
“Jobs have been squeezed in sectors from business to transportation, resulting in fewer homeowners taking on bigger and better jobs, coupled with a reluctance to take out high-interest mortgages, has fallen into the white-collar, middle-class, upper-middle class. It is a management ‘recession’,” Dhawan wrote.
“This is not a recession in the traditional sense, as job creation continues in the health care, hospitality and construction sectors,” he added. “But it’s not balanced growth. In the so-called ‘Goldilocks economy’ of the late 1990s, two high-wage jobs were created for every low-wage job,” he says. That’s not the case now. Growth in high-paying jobs has completely stopped. The question is whether the Fed’s rate cuts can cause a reversal. ”
experts said Bisnow The ups and downs in all sectors will continue until 2024. But the reason for optimism is largely driven by signals from the Federal Reserve that it may reverse rate hikes in 2024.
Margaret Stagmaier, managing partner at apartment developer TriStar, said the prospect that the Fed could cut interest rates three times in 2024 could reduce uncertainty and pressure on commercial real estate values. He said it would be of great help.
“I think we need to settle into a new normal. In fact, it was the old normal before interest rates were this low,” Stagmeier said. “And I think the Fed will step back to some extent. But the low interest rates of the past five years were not sustainable, so they won’t be repeated.”
Georgia Tech’s ties to metropolitan higher education institutions and historically Black colleges and universities that produce a skilled and diverse workforce are still seen as engines of economic development and cushion the collapse of urban activity. .
Recent Bisnow At an event focused on the outlook for 2024, KC Conway, principal at economic research firm Red Shoe Economics, said the current migration from Florida to Georgia is due to real estate operating costs and He said the main reason is the rising cost of ownership.
“What’s the number one reason they move from Florida? It’s not because it’s a nice place or it’s sunny or anything like that. No. 1 [reason is the] The cost side, and that’s out of control: property insurance,” Conway said at the Dec. 5 event. “Companies are saying, ‘You know, we can’t make it work.’ Homeowners can’t make it work. Their property and monthly real estate insurance premiums are on the mortgage. exceeds.”
But Conway said it will likely be another industry that will lead the state’s recovery, rather than the tech companies that fueled Atlanta’s momentum before and after the pandemic hit.
Georgia’s electric vehicle manufacturing boom will expand further in 2023, with Hyundai and LG spending billions of dollars and Rivian last month winning final approval for a $5 billion factory outside Atlanta. The industry is poised to continue to grow, especially in the Peach State, supported by the growing Port of Savannah.
“The new activities will build a new economic legacy for our community,” Conway said. “We’re in a great position with the right geography, the right GDP, the right economic environment. We’re not free, we don’t have income tax, but it’s not very high. We’re a business-friendly environment. Ruined Let’s not do that.”