Metro Atlanta’s commercial real estate has been in a slump for years, and it could remain there longer if one of the region’s biggest tenants and property owners — Uncle Sam — begins downsizing.
Over the past two years, the White House and Congress have asked government agencies to find $18 billion in cost savings from lease changes and surplus, underused or obsolete property.
The process could take years to play out and involve a yet-unformed Congressional commission. But locally, change is already underway, and the prospect of government moves putting more space on the market has many fearing the effect — especially after the region’s commercial vacancy rate rose to 17.2 percent in the second quarter.
“If the government vacates or consolidates 25 percent of its occupied space, the Atlanta office market may have to wait another three to five years before the start of a recovery,” concluded a recent report by Greensboro, N.C.-based turnaround firm Anderson Bauman Tourtellot Vos.
Federal offices from the FBI to the IRS are tucked all around the region, from College Park to Chamblee. Agencies inhabit buildings from the Peachtree Summit to Centennial Tower and Peachtree Center. The Centers for Disease Control owns three campuses, and leases another 1.4 million square feet.
John Connor, the Atlanta-based principal who wrote the Anderson Bauman report, estimated the federal government owns or leases 8 million square feet of property in metro Atlanta. Of that, 4.7 million square feet is leased for $106.9 million in annual rents. Leases on about half that space, totaling $42.3 million in annual rent, expire in the next three years.
“It’s pretty volatile as far as I’m concerned,” Connor said. “This budget reduction is going to be an ongoing battle that may take two to three years to play out.”
Connor estimated Georgia has the fifth most government real estate nationally, not including the Washington, D.C., area.
Metro Atlanta’s commercial real estate market already suffers from overbuilding during the boom prior to the recession.
Chris Macke, a senior real estate strategist based in Washington for real estate services firm CoStar Group, said if the feds give up 2 million square feet of space through consolidations, the metro area’s commercial vacancy rate would rise to 17.9 percent.
“The psychology of it would be the most damaging,” Macke said. “It makes the situation worse.”
Shyam Reddy, regional administrator in Atlanta for the General Services Administration, which handles real estate for the federal government, said the government is sensitive to concerns about the effect on the market.
“I don’t want the private sector to view what Congress and the White House are trying to promote as something that will really devastate the local real estate markets,” he said. “That’s really not going to happen. It’s more an opportunity to make our real estate more efficient.”
He said the most obvious places to be vacated or sold off — from obsolete lighthouses to labs and shacks for fish and wildlife officers — will barely affect Atlanta. A list of 14,000 “excess” properties released in May had only five here, mostly small storage buildings slated for demolition.
“The reason why they keep calling it a realignment process is because there are properties on the books that make no sense being on the books,” Reddy said.
But he said office leases at above-market rates will be renegotiated.
“If a bad lease is out there, and we have to terminate it, that’s no different than what a corporation would do,” Reddy said.
He said he already is cutting back where he can based on the mandate from Washington. About six months ago, his agency consolidated five FBI leases in two locations into one 130,000-square-foot lease on Century Parkway in DeKalb County.
Although the vacancy rate for federal buildings in metro Atlanta is only about 2.5 percent, Reddy said he has some space available that would allow him to cancel some leases.
For example, he wants to move Housing and Urban Development out of privately-owned 40 Marietta St. into the government-owned Peachtree Summit building on West Peachtree. And he has some room at the recently renovated Martin Luther King Jr. Federal Building downtown.
Other leases are coming due that could hasten change. The Federal Aviation Administration, now in a 218,000-square-foot building in College Park, could build or move into a new regional headquarters, Reddy said.
A 200,000-square-foot lease in Corporate Square for the CDC soon will expire. George Chandler, the CDC’s director of building and facilities, said the agency hasn’t made a decision about what to do with that space yet.
But in general, CDC plans to downsize its footprint by using less space per employee, moving employees into owned buildings, and encouraging teleworking and other flexible work options.
Such trends could affect developers, architects, engineers, landlords and brokers who for years have seen the feds as a steady source of work.
“The days of having lots of space with few employees are long gone,” Reddy said.
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