Atlanta’s industrial market is hotter than the proverbial pistol. Second-quarter activity set a single-quarter record with more than 18.2 million square feet leased or sold. When added to the activity from the previous three quarters, Atlanta strung together more than 59.6 million square feet of completed transactions. This represents the second highest activity level ever recorded for a four-quarter period. There was more than 6.3 million square feet of positive net absorption. Combined with the previous three quarters, Atlanta shows a total of more than 19.7 million square feet of positive net absorption for the last four quarters.
For the second quarter, the availability rate dropped one-tenth of a percent to 14 percent — the lowest it has been since the fourth quarter of 2000. And just four to five years ago, the overall availability rate was above 20 percent.
Development and construction are absolutely booming. With more than 7 million square feet of new construction recorded during the second quarter, the market also set a record for new construction in a single quarter. When looking at the four-quarter total, we see more than 18.8 million square feet of new construction — a level not seen since 1998. Of that mix, approximately 40 percent of the new product are build-to-suit facilities and 60 percent of the space is being built on spec.
Sim Doughtie,
King Industrial Realty/CORFAC International
Some of the projects that have been announced and are currently under construction in the Atlanta industrial market include:
• Fairburn Logistics Center — 1.1 million square feet — spec turned build-to-suit for Google/Menlo Logistics
• Union Station Business Center — 987,840 square feet — spec
• King Mill Distribution Park — 846,496 square feet — spec
• Prologis I-85 Jefferson Park — 714,965 square feet — build-to-suit for Reckitt Benckiser
• Gillem Logistics Center — 700,000 square feet — build-to-suit for ES3 LLC
• Highland 75 — 574,000 square feet — build-to-suit for Surya
Put in perspective, this is a high degree of activity — even in a large market with more than 680 million square feet of distribution and service center space spanning 10 major submarkets of metro Atlanta.
What’s Behind the Surge?
The overall economy is improving, and the lending environment is much better and beginning to normalize. Atlanta is a really big economy and has 13 of the Fortune 500 companies in the U.S., which is third behind New York (48) and Houston (13). By air, Atlanta is within two hours of 80 percent of the U.S. population. Regionally, we have been growing for decades. The 29-county Atlanta region is now home to an estimated 5.6 million people according to the 2014 list of Metropolitan Statistical Areas (ninth in the U.S.), a population that is larger than 24 states. From 2000 to 2010, Atlanta was third overall in growth for the nation (behind Dallas and Houston in the same period).
In addition to being the largest hub in the region with nearly 50 million people in the Southeast (excluding Texas), we consume a lot of goods and services and the providers of those goods and services need distribution and service center real estate to serve their customers.
At the moment, our unemployment rate is reasonably low at 6.3 percent and the housing market is getting stronger.
There are three reasons for the rebound in new development: a recent dearth of building, more relaxed lending practices by the banks and a great deal of investment capital in the market.
From 2008 through 2014, new construction of industrial product was limited to build-to-suit projects. That’s a long time for a market our size to go without new construction. Plus, during that six-year span, requirements have evolved for many industrial space occupiers, which need ever-increasing clear heights, expanded trailer parking and high-tech facilities to increase the efficiency of their operations.
In terms of lending, banks have returned to extending non-recourse construction loans for up to 65 percent of the total cost for new, speculative buildings. This means that the builder-developer is expected to supply 35 percent of the total cost of the project, and if things go bad, the builder-developer is not personally responsible to re-pay the 65 percent loan back to the lender. In such a scenario, the builder-developer would only lose the 35 percent of its equity in the speculative deal.
In regards to new construction of spec, high-tech buildings, along with the current lack of supply and strong demand for these facilities, a third reason for the jump in new spec construction is the booming investment market. Essentially with below 6 percent capitalization rates being the new norm for investment sales (which translates into higher than normal sales prices), builder-developers are building spec buildings as fast as they can to hopefully lease to good credit tenants, and then take advantage of the current booming investment sales market while it’s still hot.
Looking ahead, net absorption left negative territory at the beginning of 2012 and has continued its upward path since then (13 quarters in a row of positive net absorption) and we expect net absorption to remain in positive territory for the next four quarters and beyond. Further, net absorption is tracking activity nearly in lock step, which is indicative of a fairly balanced marketplace.
— By Sim Doughtie, SIOR, CCIM, President, King Industrial Realty/CORFAC International. The article was originally published in the October 2015 issue of Southeast Real Estate Business.