Atlanta Industrial Market Weathers Slower Demand

by John Nelson

By Charlie Adams and Walker Adams of NAI Brannen Goddard

Industrial real estate in Atlanta is in limbo as of the second quarter of 2024. Certain submarkets in Atlanta have been overbuilt and tenant demand with historically active users (third-party logistics, wholesale, e-commerce, etc.) has decreased in comparison to what was seen over the last four years. As a result of the space grab during COVID-19, many logistics tenants are sitting on excess inventory within their buildings. Consumer demand has cooled, increased interest rates have dampened the economy as a whole and rents have risen 14.5 percent year-over-year, according to CBRE’s most recent report.

Charlie Adams, NAI Brannen Goddard

The impact of these headwinds for traditional industrial (warehouse and distribution) real estate is positive. Developers haven’t had the fundamentals allowing overbuilding to a point of hyper-supply. Industrial construction starts have been few and far between over the past 12 months, and we believe this lack of new supply will keep Atlanta’s fundamentals healthy through this limbo we’re currently experiencing.

With 4 million square feet of net absorption in first-quarter 2024 and 15.9 million square feet under construction, we should see 2025 vacancy in line with current vacancy, assuming absorption continues at a similar pace. Therefore, we should see no major shift in Atlanta market fundamentals.

For markets such as Charleston and Greenville-Spartanburg, looking at the same first-quarter net absorption numbers and under construction supply, we expect to see large upticks in 2025 vacancy rates. Regionally, we believe Atlanta is very well-positioned to weather this economic cycle.

Walker Adams, NAI Brannen Goddard

Per CBRE’s first-quarter industrial report, we’re still seeing increasing base rates ($7.24 triple net-lease market average). Though 14.5 percent year-over-year was achieved in the past 12 months, we expect this growth rate to decrease over the next 12 months as vacancy rates have increased from approximately 4 percent in 2022 to 7 percent today. Supply and demand will drive our market just like any business, and there is currently an imbalance in most Atlanta submarkets.

Halfway into 2024, we’ve felt an uptick in tenant activity, which is a great sign for market health. We’re seeing active proposals across all submarkets, and those proposals have begun matriculating to leases. However, it is still very much a tenant’s market for spaces in excess of 200,000 square feet. We expect this to last for another 12 to 24 months as leasing begins to chip away at the supply delivered in 2022 and 2023 and new supply requires 12-month lead times to delivery.

For leasing on smaller spaces in the 5,000- to 50,000-square-foot range, landlords haven’t missed a beat since the boom market of 2021 and 2022. The Atlanta rental rate growth has held strong and is likely skewing some of the data, such as the 14.5 percent annual rent growth mentioned above. Suites or buildings from 50,000 to 200,000 square feet are still seeing rent growth and healthy occupancy levels, but we’re also seeing more concessions granted by landlords to secure occupancy.

Capital markets have also seen a slowdown as the fundamentals are tougher: more expensive debt and little to no pricing movement from sellers to accommodate the buyer’s greater expense of capital. This is reaching a tipping point, however. To get capital out the door, industrial aggregators are bidding up marketed deals with extremely thin returns for publicly marketed deals. Those deals are still pricing 10 to 20 percent lower than the peak of the previous market, and sellers with long-term confidence in the market are holding, regardless of the interest from capital and the success in the public capital markets space.

Owners and users are also active, as we’ve seen pricing beyond peak capital markets become available.

The brightest spots are in the manufacturing and data center development sectors. Supply chain optimization has become crucial in the post-COVID world and AI breakthroughs have created an insatiable demand for data processing. Both sectors are power-, water- and sewer-intensive, and subsequently, for today, utility infrastructure has replaced location as the most valuable elements of industrial real estate site selection.

For manufacturing specifically, we are seeing inland port locations as drivers for end users. The Blue Ridge Connector under construction in Gainesville has resulted in significant manufacturing growth in the Northeast Georgia region. Plus, the Georgia Ports Authority is set to being construction on the West Georgia Inland Port upon completion of the Blue Ridge Connector. The inland port will be located in LaGrange along I-85 South.

Our team represents Farpoint development on two projects located along the I-85 South corridor. The first project, Lafayette Logistics, is located in LaGrange in immediate proximity to Kia’s North America manufacturing headquarters in West Point. The project will cater to users looking to benefit from delivery of the West Georgia Inland Port in the next two to three years. The LaGrange site has capacity for approximately 2 million square feet of Class A industrial space, and the demand has been significant.

We’re seeing similar demand trends at REAL Park, a 7 million-square-foot, build-to-suit project just west of the Georgia/Alabama border in Macon County. The park will also focus in on the growth of the automotive industry and nearshoring manufacturing supply chains. REAL Park is located between Hyundai and Kia and is just west of LaGrange and east of Montgomery.

— Charlie Adams and Walker Adams are senior vice presidents at NAI Brannen Goddard. This article is set to appear in the July 2024 issue of Southeast Real Estate Business.

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