In the words of Marilyn Monroe, “Sometimes good things fall apart so better things can fall together.” The retail market forges ahead in its quest to essentially reinvent itself in response to the ever-increasing growth in online sales. This revitalization is characterized by decreasing the footprint of their brick and mortar stores and expanding the size of their e-commerce fulfillment centers. Fortunately, the biggest beneficiary of this growing trend is the industrial market.
There’s been a lot of talk about retailers suffering from the boom in internet sales. Quite frankly, do you really believe a retailer cares if they sell their product in a storefront or through the internet and their e-commerce delivery system? I contend they do not care as long as it is their product being sold. The retailers that do not embrace internet sales, in conjunction with their in-store sales, will be going the way of companies like Toys “R” Us — losing sales and eventually closing down because they are not able to compete in today’s online world.
The competition between e-commerce delivery systems has heated up even further due to “just in time” or last-mile delivery. Customer expectation on some items is shifting from two-day service to one- or two-hour service. This has been putting extreme pressure on delivery and logistics firms to find close-in, smaller warehouses to deliver the more popular, most ordered items in less time, which is another favorable trend for the industrial market.
Sim Doughtie
SIOR, CCIM,
President,
King Industrial Realty Inc./CORFAC
International
The benefit of this transition is quite apparent in the performance seen recently in the Atlanta industrial market. Activity, positive net absorption and new construction have all been operating at a record pace. Activity has been driven by demand for e-commerce space that essentially did not exist five years ago — 36- to 40-foot clear heights to accommodate the three-story mezzanines and the required conveyer belt systems. High demand and lack of supply has led developers to build these “next-generation” warehouses. Readily available equity from investors and banks starting to lend again — sometimes with 65 percent non-recourse loans — made this new construction possible.
Once leased with credit tenants, these new e-commerce fulfillment centers were snapped up by the investment market at sub-5 percent capitalization rates. Additionally, in many cases, the money the tenant spent on the operation set-up inside of the building was more than the building actually cost to construct. Investors are betting this means the tenants will stay in the space for the long run.
Atlanta is ‘red hot’
To give you an idea of the imprint the e-commerce trend has had on the Atlanta industrial market, over the past five years, the Atlanta industrial market has averaged 57 million square feet per year in leasing and sales activity. Prior to this record performance, the highest total activity produced in a calendar year was 49 million square feet in 2001 and 50 million in 2007.
Over this same five-year period, the Atlanta industrial market also enjoyed positive net absorption that averaged over 17 million square feet per year. The impact on new construction during this time frame has been felt as well. Atlanta developers have built almost 94 million square feet of warehouse space (approximately 18 million square feet per year) to satisfy the e-commerce appetite. It should also be noted that the availability rate in the Atlanta industrial market during this period of record new construction actually dropped from 15.2 percent to 11.4 percent.
The latest rumor is that The Home Depot supply warehouse at Fort Gillem is selling in the 4.6 percent cap rate range, which would be a record low figure for our market. To anyone doubting the strength of the Atlanta industrial investment market, all you have to do is look at the dozen or so warehouse buildings purchased in the past year that were vacant at the time of purchase. Buyers are willing to take the lease up risk in this red hot market we are now experiencing.
Another strong quarter
So how is the Atlanta industrial market doing today? Leasing and sales activity continued strong with 13.5 million square feet in the second quarter of 2019, bringing the four-quarter total to over 54.3 million square feet leased and sold. Positive net absorption was 2.6 million square feet for the quarter, with a four-quarter total of 14.9 million square feet. That marks 29 quarters in a row of positive net absorption for the Atlanta industrial market.
New construction starts in the second quarter were over 4.3 million square feet, which totaled over 20.2 million square feet for the four-quarter period. A vast majority (84 percent) of that new construction was speculative construction as developers continued to try to keep up with the demand for modern, up-to-date warehouses.
The hottest submarket in metro Atlanta the past 12 months is the Interstate 20 West/Fulton Industrial region. Over the past four-quarter period, this region accounted for 28.3 percent of all of the activity and a whopping 41.9 percent of all of the positive net absorption. Some of the more notable transactions in this region were PVH/Phillips-Van Heusen (982,777 square feet), Stitch Fix (925,800 square feet), Atlanta Bonded Warehouse (499,320 square feet), US eLogistics Service Corp. (498,480 square feet), SP Richards (461,552 square feet) and BroadRange Logistics (408,600 square feet).
The second and third hottest markets for activity were the Interstate 85 Northeast close-in region and the Airport/Interstate 75 South region with 24.1 percent and 14 percent, respectively. The second and third hottest markets for net absorption were the Airport/I-75 South region and the I-85/985/316 region with 19.8 percent and 18.7 percent, respectively.
As of this writing, the Atlanta industrial market continues its winning ways. At this point, we are closely watching the challenges generated by trade wars, the Euro Zone countries, and the stock market (the Federal Reserve Bank lowered the rate once and may do it again). Despite these uncertainties, we still have confidence the Atlanta industrial market will continue to see things “fall together.”
— By Sim Doughtie, SIOR, CCIM, President at King Industrial Realty Inc./CORFAC International. This article originally appeared in the October 2019 issue of Southeast Real Estate Business.