The Future of the Downtown Atlanta Office Market
By Bill Adams, President, MBA, CCIM, CRB, ALC
The City of Atlanta has three major office submarkets within the city limits—Downtown, Midtown and Buckhead. When I was growing up in the city during the 1950s and 1960s, the only substantial concentration of office buildings was in Downtown Atlanta. I have a unique perspective on Downtown in that all my formal education from the First Grade to an MBA occurred in Downtown Atlanta.
The Downtown office market is smaller than the Midtown submarket and about the same size as the Buckhead submarket. The Downtown building stock is much older than the other two submarkets and Downtown Atlanta, like other central city office markets, has suffered because of the move to remote working. Class A buildings with great amenities are one of the key factors luring employees back to the office. Downtown Atlanta has few Class A buildings and is at a competitive disadvantage when it comes to vying for office tenants and attracting workers back to the office.
While Downtown Atlanta currently has a large concentration of Federal, State, City and County offices, I believe Downtown will also have a substantial residential district in the future. The trend of converting office buildings to residential use began in the 1990s with the conversion of buildings that once housed Savings and Loan institutions. A few old office buildings were also converted to data centers and hotels.
Converting office buildings to residential use is particularly challenging and expensive. A prospective building must have a floor plate that is conducive to conversion to residential use. Most office buildings have two restrooms on each floor. A residential conversion will require plumbing for a kitchen and a bathroom in each apartment on the floor. Mechanical systems will have to be upgraded to meet current building and fire codes. A project will have to meet Americans with Disabilities Act (ADA) accessibility requirements and may have to comply with Atlanta Urban Design Commission guidelines for historic buildings. Parking in Downtown Atlanta has always been problematic and many properties that are good candidates for conversion to residential use have little if any onsite parking.
The biggest obstacle a developer will face is making the financial numbers work so a redevelopment will be profitable. A developer with access to unlimited funds and patient investors will turn a profit eventually. Most developers don’t have that option. A smart developer will seek out opportunities to acquire a property at a bargain basement price. With the current state of the Class B and C office market there is a good chance that lenders will take back many of these underperforming properties. If the lender writes down the price of a building to get it off their books, it presents a great opportunity for a developer to acquire a property at a low basis.
The public sector will play an important role in a successful office conversion. A developer might seek Low Income Tax Credits or Historic Tax Credits, both of which can provide equity to a property. A Downtown Atlanta property might be eligible for Tax Allocation District (TAD) funds through the City’s economic development agency, Invest Atlanta. The Federal government has proposed a mix of low-cost loans, loan guarantees, tax incentives and grants to further the transition from office to residential use.
Although difficult and expensive, converting old office properties to residential use solves two issues that trouble the real estate market—the oversupply of underutilized office properties and the undersupply of affordable residential properties for sale and for rent.
If you have any questions, I can be contacted at (404) 688-1222 or wtadams@adamscre.com.