Expansion Imminent After Atlanta Industrial Sector’s Near-Historic Absorption in 2014, 2015

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The Atlanta industrial market is in the beginning stages of its third growth cycle since 1990. Vacancy has declined over the past 18 quarters, and asking rates have seen a positive trend over the same time period, increasing by 14.9 percent. These improving metrics should come as no surprise to those familiar with the history of Atlanta’s industrial market. Although the Atlanta metro is the nation’s ninth-largest metropolitan area, its industrial market represents the fourth-largest by volume. Total vacant space in the market has fallen to a 13-year low 8.7 percent, meaning the metro is once again poised for industrial expansion.

Cycles One, Two and Three
Atlanta’s growth cycle in the 1990s lasted just under 8 years, from 1994 until 2002, where 135 million square feet of new product was added to the market. That constitutes almost a quarter of the total 549 million square feet in the metro today. Total vacancy had fallen to 9.2 percent in the middle of 1994 and asking rates hit what was then an all-time high of $3.26 per square foot. These factors triggered a 40 percent rise in construction volume. As this cycle closed in 2001, vacancy rose back above 10 percent in the fourth quarter of 2001.

The subsequent construction wave began at the end of 2003 after asking rates rose to a peak of $3.98 per square foot. However, the total market vacancy remained relatively high at 12.6 percent. New product came to market, suppressing asking rates throughout the metro area. Vacancy saw slight improvement, but never fell below 10 percent, even up to the beginning of the economic downturn in 2008. Two years into the recession, vacancy hit a 30-year high of 15 percent and asking rents hit a 14-year low of $3.24 per square foot. An abundance of new construction during this cycle went dark and left Atlanta with a multitude of spaces to fill in addition to the pre-existing vacancy.

Over the next three years, metrics gradually improved and some large properties delivered in the beginning of 2013. However, the current wave of construction didn’t start until the end of 2013. With vacancy flirting with a figure below 12 percent for the first time in almost six years, construction volume shot up from 850,000 to 2.4 million square feet. Over the next three quarters the construction volume nearly quadrupled to 8.3 million square feet.

In the fourth quarter of 2014, total vacancy for Atlanta finally fell to 9.4 percent. Atlanta had not seen a figure below 10 percent since the turn of the second half of 2001. First-quarter 2015 saw the number of projects under construction double, and total volume rise to 16.7 million square feet. The first substantial wave of deliveries hit the market in the first quarter with 1.2 million square feet coming on line over seven buildings.

Where We Are Now
The amount of industrial construction in Atlanta is almost unprecedented. Only one other quarter (fourth quarter 2005) has experienced higher activity than the 16.8 million square feet currently under construction. Of the total under construction, 41 percent represents build-to-suit projects for pre-leased tenants. However, 59 percent constitutes speculative development, which signifies restored confidence in the Atlanta market by investors — not only in the Southeast, but nationwide.

Last year the Atlanta industrial market experienced the second-highest net gain in occupancy in the nation, trailing Chicago by only 150,000 square feet. The 17.4 million square feet absorbed in 2014 was the third-highest in Atlanta’s history. With 4 million square feet of absorption in the first quarter of 2015, market fundamentals have been advancing despite the tightening market conditions. More than 80 percent of new leasing activity for the quarter consisted of spaces smaller than 150,000 square feet; small spaces are dominating current leasing activity due to a shortage of large block space.

The new development cycle is adapting to the needs of prospective large users. During prior development cycles, buildings under construction averaged 240,000 square feet. Currently, buildings under construction are double that size, with an average of 540,000 square feet. Looking forward, Atlanta’s ability to serve as a primary distribution hub for the Southeast and the Port of Savannah will continue to drive the demand for industrial space in the market.

As new large product delivers, the tightening conditions experienced over the past two years should be alleviated. Asking rates will likely be suppressed in the short term from the addition of competitive space, but eventually the market should see long-term gains over the next 24 months. We expect Atlanta to continue this growth cycle into 2016 and beyond.

— By Travis Deese, Senior Research Analyst, CBRE Research. This article originally appeared in the May 2015 issue of Southeast Real Estate Business.