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If Atlanta's office market in trouble, how about Chicago?

Guess what. Large cities are in real trouble. The top 10 largest US cities have actual average office occupancy under 50% of the level before the pandemic. Folks aren't coming to work, businesses are contracting the amount of space they use.


The large city as we know it is becoming somewhat obsolete and no amount of good intention is going to repurpose office cores into a residential community.


Large cities will still be around, but their daytime populations and economies will be permanently injured. Ouch!


If a thriving economy like Atlanta is getting slammed you can imagine what's going to happen to Chicago whose economic growth and population are shrinking.



Even a Booming Economy Can’t Save Atlanta’s Office Market

Sunbelt city offers warning to others hoping to fill up office towers

Atlanta’s commercial-property turmoil shows that even Sunbelt cities with thriving economies can’t escape the office-sector meltdown.



Atlanta’s commercial-property turmoil shows that even Sunbelt cities with thriving economies can’t escape the office-sector meltdown. ELIJAH NOUVELAGE/BLOOMBERG

By Peter Grant and Deborah Acosta, WSJ

Sept. 25, 2023 5:30 am ET


Atlanta has been one of the Sunbelt’s biggest boomtowns, where the population and job market are growing fast. But you would never know that from its slumping office market.


Vacancy rates are soaring and companies are competing to unload space in the sublease market. Office values and rents are falling. Developers are delaying new office projects, while office defaults are mounting.


Atlanta’s commercial-property turmoil shows that even Sunbelt cities with thriving economies can’t escape the office-sector meltdown. Strong job growth hasn’t made up for the city’s anemic return-to-office rate, a glut of new office supply in the years leading up to the pandemic and companies shedding space as leases expire.


Atlanta’s office-vacancy rate has increased to 14.7% from 11.5% at the end of 2019.


It offers an ominous warning to other cities that are hoping their office towers will fill up again when more robust economic growth returns.


“In the past, you could take the job numbers and see a one-to-one-relationship to how much office space we’re going to add,” said Madelyn Shields, associate director of real-estate-data firm CoStar Group. Today, she said, “there’s a total disconnect.”


Now, the jump in interest rates that began in 2022 is pushing many property owners over the edge. Miami-based Banyan Street Capital gave up six office towers and an underground mall inside Atlanta’s downtown Peachtree Center in a foreclosure auction last year. More recently, Starwood Capital Group defaulted on an office-building mortgage that it was unable to refinance, according to loan documents.


“We have been working with the loan servicers to find a solution that best fits the lending group and our investors,” a Starwood spokesman said.


Atlanta’s office-vacancy rate has increased to 14.7% from 11.5% at the end of 2019, according to CoStar. That is well below the 20% vacancy rate in San Francisco. But CoStar is projecting that forces such as additional company downsizing will push Atlanta office vacancies above the city’s record 16% level it hit during the 2008-09 global financial crisis.


Sublease space stands at a record 9.1 million square feet. AT&T, fintech giant NCR and consulting firm McKinsey are among the companies that have shed big blocks of space in the sublease market or have downsized as part of new workplace strategies.



Businesses and office spaces in downtown San Francisco have struggled to recover since the height of the pandemic. PHOTO: SHELBY KNOWLES FOR THE WALL STREET JOURNAL

The sublease space is hitting the Atlanta office market as it simultaneously tries to digest 18.1 million square feet of new space that has been delivered since 2017, when available office space stood at roughly 320 million square feet, CoStar said.


Atlanta’s weakening office market is hammering the city’s hotels, particularly lodgings that rely on business travel and conventions. In the past four months, occupancy rates have declined while demand has fallen, according to hotel-data firm STR.


Atlanta business travel is declining because one of its main drivers is visits made to customers or colleagues in their offices.


“If that person is not in that office, why would you still go to that city?” asked Jan Freitag, CoStar’s national director for hospitality analytics. “If you’re in your kitchen, let’s do that on Zoom.”


Some hotel owners are giving up. Arden Group defaulted last year on its $98.2 million mortgage on the Sheraton Atlanta, a convention-oriented property. This year, Ashford Hospitality Trust is handing back the keys to its lender on a portfolio of hotels including the W Atlanta, a luxury hotel near Peachtree Center.


Fast rental growth in Atlanta’s apartment sector has also slowed after a wave of new construction. Occupancy rates in August were down 1.2 percentage points compared with a year earlier, according to real-estate-data company Yardi Matrix.


The commercial-property-market struggles contrast with Atlanta’s economic success story in recent years. The city’s relative affordability, temperate climate and diverse workforce have attracted numerous big employers in recent years, including railroad Norfolk Southern, the U.S. division of Mercedes-Benz and pizza company Papa Johns. Visa earlier this year opened a new office in Atlanta that now employs over 450 workers.


Overall, Atlanta added more than 237,000 jobs the past two years, an 8.4% gain in employment, making it the seventh-strongest region in the country, according to commercial-real-estate-services firm JLL.


With housing in short supply, developers are converting more empty offices into apartments. But not all buildings are candidates for reuse, even as more than one billion square feet of office space sits vacant across the U.S. Photo Illustration: Amber Bragdon

But job growth is now softening in part because of the slowdown in technology, which was among the industries expanding in Atlanta. Microsoft earlier this year said it was pausing the planning process for a 90-acre project on the west side of Atlanta. Google also is slowing its expansion plans in the city.


High interest rates have also reduced corporate appetite to relocate headquarters and offices to Sunbelt cities such as Atlanta, according to brokers. It is a tougher sell if a relocating worker has to sell a home with a low mortgage rate to buy in Atlanta with a new mortgage at today’s higher rates.


“How do you move someone who’s paying a mortgage of under 3% and tell them to pay 7.5%?” asked John Shlesinger, a vice chairman in the Atlanta office of CBRE Group.


Atlanta’s weak return-to-office is adding to the strain on commercial property. That rate had been rising steadily. But more recently it has stalled at roughly 50% to 60% of what the office-use rate was before the pandemic, office brokers say.


The city has the fifth-highest percentage of companies with hybrid work strategies of the 25 Sunbelt markets tracked by Scoop Technologies, a software company that developed a workplace-strategies index. More than 76% of the 1,900 companies with employees in the Atlanta region that Scoop follows allow employees to work remotely at least part of the week.


Notoriously bad traffic is a big reason fewer workers are in the office as regularly, said Rob Sadow, chief executive of Scoop. Commuting time has a bigger effect on the adoption of hybrid work than “whether a city is located in the South or the North,” he said.


Some developers remain bullish on Atlanta’s office demand. This summer, Rockefeller Group broke ground on a 60-story mixed-use tower that includes about 230,000 square feet of office space and 350 rental apartments.


“Even in an anemic return to office, tenants will need a place to call home, and we will be there to accommodate a more downsized efficient tenant,” said John Petricola, Rockefeller’s head of Southeast development.


But other developers are pulling back. Shaul Kuba, co-founder and principal of CIM Group, said his firm is shifting its focus away from office development and more toward residential and hotel uses in a $5 billion project under way in Atlanta.



High interest rates have reduced corporate appetite to relocate headquarters and offices to Sunbelt cities such as Atlanta. PHOTO: ELIJAH NOUVELAGE/BLOOMBERG NEWS

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