‘The office is not dead’: Cousins predicts new towers will fill

The Terminus complex in Buckhead includes the Terminus 100 office tower, to the right. SPECIAL from Cousins Properties.

The Terminus complex in Buckhead includes the Terminus 100 office tower, to the right. SPECIAL from Cousins Properties.

One of Atlanta’s most prominent developers and office landlords anticipates hard times ahead for older buildings but is confident new towers won’t have an issue keeping tenants or finding new ones.

Executives for Cousins Properties spoke Friday on the company’s first-quarter earnings, offering an optimistic outlook for high-end offices as the industry braces for a potential recession. However, that positive prediction didn’t carry to the entire office sector, with CEO Colin Connolly expecting shiny new buildings to thrive as older stock falls by the wayside.

“Premier properties will fill up in time, while undesirable properties are emptying,” he said on an investors call. “The office is not dead. Rather, obsolete office is dead.”

Founded in 1958, Cousins has grown into one of Atlanta’s top players in commercial real estate. Cousins primarily focuses on the Southeast and owns multiple landmark towers throughout metro Atlanta, such as Buckhead Plaza, Midtown’s Promenade Tower, the 725 Ponce building in Old Fourth Ward and two buildings at Avalon in Alpharetta.

Cousins reported that stockholders made a net income of $22.2 million in the first three months of this year, a 20.7% decrease from the first quarter of 2022. However, the results beat the expectations of Wall Street analysts. Cousins predicted slightly more optimistic earnings for the rest of the year.

Office landlords across the country have struggled while tenants reevaluate their office space needs following the pandemic, which gave rise to remote and hybrid work schedules. High interest rates and other economic headwinds have also sparked layoffs, adding more uncertainty to future office demand.

In addition, the collapse of Silicon Valley Bank — whose parent company rents office space in Phoenix from Cousins — added more unease to economic outlooks. But Connolly said Cousins has seen promising signs that large tenants are steadily returning to physical workspaces more often.

“The return to office has accelerated and is likely to continue,” he said.

He cited the influence of large companies like Amazon and Meta, which both recently initiated return-to-office plans after previously embracing fully remote work schedules. Cousins also collected increased parking income at its properties during this year’s first quarter, which Executive Vice President of Operations Richard Hickson said is a sign of increased office use among tenants.

Connolly said the pipeline for new office projects is slowing down, and he expects leasing demand to soften this year. Cousins saw its average rent dip to $34.45 per square foot during the first quarter of 2023, nearly a 3% decline from the same quarter last year. The company also leased about 20% less space to kick off 2023 than the year prior.

But Connolly said high-end offices in desirable submarkets should be able to weather the storm.

“There’s going to be clearly winners and losers,” he said. “We do think the market is underappreciating the stability in premier properties.”

He added that Cousins has worked over the past five years to sell off $1.3 billion worth of older properties, which was used to reinvest in Class A buildings and new construction. He said the early pivot will pay dividends as office buildings are expected to see rising vacancy rates and declining values.

Nationwide, about $1.5 trillion of commercial real estate debt is set to mature before the end of 2025, which has raised concern among analysts that forecloses could sharply rise. However, Connolly said Cousins is well-positioned with few loans set to mature this year, which he said allows his company to play offense if the market sours.

“When the competition is upside down with debt, we plan to move quickly, be aggressive and grow market share,” he said.