The scavenger hunt begins to find Atlanta office buildings worth saving

“The market is rewarding buildings that have a story for tenants,” Randy Fink, managing director and brokerage market leader for commercial real estate firm Colliers in Atlanta, told The Atlanta Journal-Constitution.

“Those that can deliver a modern workplace or experience, regardless of label, those are winning,” he continued. “If you are unable to do that, you have a challenge.”

The Atlanta area ended the first half of the year with about 30% of its office square footage either vacant or available to sublease, according to data from real estate services firm CBRE. Most of that space is concentrated in older buildings, which have struggled to recover from the COVID-19 pandemic’s impacts on the office market and commuting habits.

Of the remaining stock, it’s starting to shrink with 14 million square feet of offices being demolished, converted or purchased by owner-operators. For example, a multifamily developer paid $12.2 million last month to buy a vacant office building at 1855 Satellite Blvd. in Duluth to tear down for a new apartment project, according to property records.

The purge leaves several buildings on the cusp of irrelevance. Despite the glut of options, investment groups have started to scoop up buildings across metro Atlanta because they say there’s potential for an office-centric rebound around the corner. They’ve begun feverishly searching for diamonds in the rough that have the potential to woo tenants with a fresh coat of paint and a revamped marketing push.

“We feel like office has hit bottom, and we’ve turned a corner,” Adam Abeln, chief acquisitions officer for real estate firm Real Capital Solutions, said. “We certainly think this is a generational opportunity for office today.”

Abeln’s company in June paid $49.5 million to buy 101 Marietta, a 36-story office tower in downtown Atlanta. Real Capital Solutions bought the building at a 28% discount from its last sale in 2015, providing some breathing room on debt payments and freeing up financial room to renovate the 54% occupied tower.

Credit: Hyosub Shin/AJC

Credit: Hyosub Shin/AJC

Real Capital Solutions has spent $650 million across the country over the past 22 months to acquire 14 buildings, including 101 Marietta. Abeln said Atlanta has an office market in mid-recovery, which presents an opportunity for aggressive buyers who find the right buildings even as their values decline.

“When there’s a collapse in values, people think it’s risky,” Abeln said. “But really what that’s telling you is that office was previously priced to perfection. … That pricing reset is now the opportunity.”

‘Margin of safety’

During real estate cycles, declining values are often referred to as a market “reset,” creating pain for owners and opportunities for buyers.

Whether it’s because there are fewer tenants paying rent or increased debt obligations because of interest rate changes, some buildings see their values sharply drop. Some owners can weather the storm, while others have to decide whether to cut bait and sell. Otherwise, they may face the foreclosure block or sinking money into a building that’s no longer worth its debt payments.

New owners are able to buy these struggling buildings at a discount and reset its basis, an industry term for its starting value. That affects debt payments and property taxes, providing time for the new owner to invest in the building and try to woo tenants.

Abeln called it a “margin of safety,” and it’s a strategy that pays off if the purchase price ends up being a bargain and tenants end up finding the building desirable.

“You’re going to continue to see owners have to reinvest in their buildings,” said Colin Connolly, CEO and president of Atlanta-based landlord Cousins Properties. “A choice not to reinvest becomes a self-fulfilling prophecy. It’s a race to the bottom.”

This is highlighted in the monthly rents of certain types of office buildings across metro Atlanta. Real estate experts divide properties based on their perceived quality, typically with prime at the top, class A just below that and then class B.

Prime buildings had the lowest amount of available space at the end of June while also commanding the highest rents in the region, according to CBRE.

Ellen Stern, an Atlanta-based senior vice president with CBRE, said leverage lies with landlords who own prime space because there’s less availability. But the inverse is true for lower-quality assets, where class A and class B buildings have to distinguish themselves to seal the deal with tenants.

“Depending on what building we’re talking about, it could be two totally different markets,” she said.

That bifurcation has led to a market of “haves and have-nots.” But investors able to buy the latter and turn it into the former stand to make a lot of money, which is informing Real Capital Solutions’ strategy with 101 Marietta.

“There is no pride of ownership with buying the best building in the market,” Abeln said. “What we like to do is always buy the third nicest or fourth nicest building because we know we’re good operators. And if we put capital into the building, the tenants will come.”

Credit: Hyosub Shin/AJC

Credit: Hyosub Shin/AJC

He said lobby renovations and the incorporation of move-in-ready office suites should help snag interest, while all the mixed-use and entertainment-focused development taking place in downtown will make the area more appealing.

Addison Meriwether, an Atlanta-based executive managing director at real estate services firm Cushman & Wakefield, said the importance of vibrancy is hard to overstate.

“The best amenity you can give people is other people,” he said. “It’s hard to convince folks or companies to go into buildings that are empty.”

Demand dynamics

Office leasing dried up after COVID-19 rattled in-person workplace norms, declining about 40% from 2019 to 2023, according to Cushman & Wakefield data.

But it has slowly and steadily recovered close to pre-pandemic norms. That trend has created some optimism among office landlords, investment groups and brokers that the worst days are over.

Several office tenants have further bolstered bullishness by renewing their office leases years before they expire.

Johnny Krawcheck, managing co-director of law firm Weinberg, Wheeler, Hudgins, Gunn & Dial, recently renewed his firm’s office lease at the 3344 Peachtree tower in Buckhead. The 12-year extension increased the firm’s office footprint about 18% to roughly 75,300 square feet.

The firm’s Atlanta operation has grown from 24 attorneys in 1999 to more than 65, and Krawcheck said further expansion could be on the horizon. In fact, providing room to grow was what helped push them to stay in 3344 Peachtree, a building owned by Cousins Properties.

“We do have some paths forward if and when, as we anticipate, we continue to expand in the existing space,” he said. “That was something that really helped us seal the deal.”

Just across Peachtree Street, the three-tower Atlanta Financial Center is trying to find its footing in a post-pandemic world. Banyan Street Capital bought the distressed trio of buildings last year and tapped Newmark to revamp one of its towers for its next generation of tenants.

Credit: Hyosub Shin/AJC

Credit: Hyosub Shin/AJC

Brad Kirschner, a senior managing director with Newmark, said the north tower at 3353 Peachtree is undergoing $5 million of renovations to refresh the lobby and add move-in-ready offices, often called speculative suites. He said those spaces, which will range from 2,000 to 6,500 square feet, will act as an easy entry ramp for tenants looking to grow in the same building.

“The goal of a spec suite isn’t necessarily to have a tenant live through a five-year (lease) term,” he said. “It’s to get them in and then to progress them and keep them in love with the building.”

The building is about 60% occupied. The south tower at 3333 Peachtree is empty but recently underwent a renovation and is being advertised for sale. The 3343 Peachtree tower is also empty but has a “much grander plan” in the works, Kirschner teased, but declined to disclose further specifics.

Office investors are rushing to buy and reposition Atlanta’s buildings that are on the cusp of relevance, especially as leasing increases and their prime competitors are starting to fill up. There are also no new speculative buildings under construction in the Atlanta area, so pickings are expected to become slim in the near future for high-end space.

“There’s an uninformed perception that when an office lease expires, tenants will have numerous options because the market is bad,” said Connolly, whose company is evaluating a potential new office building project.

“However,” he continued, “if you don’t build anything for five-plus years and you bifurcate the market … the good stuff fills up.”