Writer: Max Crampton-Thomas
2 min read September 2021 — Atlanta’s real estate market has yet to tap into the vast potential of the areas surrounding the world’s busiest airport to develop class-A office space, said Hugh Scott III, CEO of SK Commercial Realty. In an interview with Invest:, Scott shared his perspective on the state of the city’s real estate market and why he is bullish on its future.
What have been some key takeaways on the Atlanta office market in the past year?
Overall, we weathered the storm a lot better than we anticipated. Businesses seemed to evaluate their particular situation and adjusted accordingly to persevere. Some organizations used the pandemic to streamline, take advantage of technology to reduce costs, and reduce space while others used the pandemic to even the playing field with their larger competitors by being more nimble, accommodating their clients during COVID, and getting back to the office when others would not in order to grow their business. Our owned properties portfolio amounts to about 3 million square feet, for which we do leasing and management. We have seen an uptick in activity over the past few months. The key takeaway is that there is movement. A trend we are seeing is there were a lot of companies that completely shut down, pulled everybody out of the pool, implemented remote working and were hesitant to get back to normal operations. A lot of those companies were large companies with more dense and large employee bases. Then, you had the smaller, local, and regional companies that are a little more entrepreneurial and had no choice but to get back into the office. Some did not have the ability to work from home. They had to get their teams back and continue to do business. Some of the companies that were slower to return to the office are looking to downsize, to take less space and to renegotiate their leases. Those that started back to work earlier last year are the companies we see that are growing and have a positive outlook. They’re asking for more space and longer lease terms. There may have been some efficiencies and cost reductions for these larger tenants to give up space and let people work from home, but those folks who were in the office, working and collaborating over the past year are seeing positive results in their sales and their growth. Overall, we see a neutral net absorption in our owned and managed portfolios.
What trends have you observed in rent negotiations and lease modifications?
With regard to rental rates, in the first months of the pandemic, we were getting inundated with requests for rent reductions, free rent or rent deferment. A lot of it was just speculation on an uncertain future. The majority of our tenants across our portfolios are weathering things well. We collected approximately 95% rate of rental payments over the past 18 months. We had very little default and most tenants fulfilled their lease obligations. We were able to structure a few deals with some tenants that showed need as different people were affected differently by the pandemic. Coming out of it, our rents have not gone down for new space. We’ve been able to hold rents steady. Flexibility is key for Landlords right now. We must listen to the needs of our tenants in a still uncertain environment. Some tenants need lower rates, more flexible terms but higher tenant improvement allowances are not a priority. Some tenants are growing quickly, need higher tenant improvement packages, and are willing to pay a higher rent. The more options we can provide existing and new tenants, the better opportunity we have to make deals.
What is the vision behind your Hartsfield Centre project?
The airport market is such an exciting market for the city of Atlanta. It’s a critical piece for the city. All of Atlanta should really appreciate what we have in the Atlanta Airport. It’s a strong, multi-industry driver that has attracted several major corporate relocations. Local residents forget how spoiled we are that we can get to just about anywhere in the world on a direct flight. That’s a huge benefit to business and industry in Atlanta. The area offers the largest, busiest airport in the United States with the smallest associated office market. A lot of cities around the country have a large class-A office market around their airport, creating a vibrant business community. You don’t really have that, yet, in Atlanta, but I believe it’s possible with the proposed developments, including Hartsfield Centre and Aerotropolis. If we can get the local municipalities onboard with the vision down there, we can flip it from a relatively underutilized submarket to a vibrant one. One Hartsfield Centre offers 150,000 square feet of class-A office space that has been well leased for several years. We have about 8 acres of additional buildable land which is contiguous to Delta’s world headquarters. We are master planning a development that could deliver around 450,000 square feet of additional mixed use space including class A office and an exciting hotel concept on the property.
What is your overall outlook for SK Commercial Realty and the industry going forward?
SK Commercial Realty has two business divisions: development, portfolio and asset ownership on one side and our fee services platform on the other. From the fee services side, we want to continue to add members to our valued team, expand our third-party brokerage and management assignments, and to create a dynamic environment for all our team members. We have a good pipeline of exciting new projects ranging from healthcare to office to industrial and we are excited to see these projects take shape in 2022.
The road is not challenge-free going forward, however. There are issues, such as crime rates in Atlanta. For anybody to feel good about new development and new neighborhoods, they must feel safe. That applies not only to new developments but for existing office, retail, industrial and multifamily communities as well. Inflation is another wild card. There are price pressures that would indicate inflation is coming. For the time being, rates are low, but with increases in commodity prices, supply chain issues, and increased labor costs, inflationary pressures seem to be on the horizon. The real estate industry also needs some direction on taxes. In 2021, there is significant uncertainty about the capital gains tax. There is some capital on the sidelines looking for investments, but it is hard for people to sell or take assets to the market when they don’t know what the capital gains implication of selling their property will be, especially when there is talk about retroactivity.
If we can mitigate some of those challenges, then we certainly can reap the opportunities that Atlanta provides. Georgia is a highly pro-business state. The relatively low cost of living is compelling in Atlanta. We have generally nice weather year-round to support the quality of life. We don’t worry too much about major natural disasters like hurricanes, earthquakes, or wildfires to disrupt business. We have a well-educated workforce and the logistical infrastructure crown jewel of Atlanta’s airport. We are hopeful that the projects that we have in the pipeline can benefit from those competitive edges. We remain highly optimistic and bullish on the future of doing business here in Atlanta.
For more information, visit: https://skcr.com/