The Atlanta industrial market has been hot and setting records for quite some time now, and the third-quarter numbers for 2021 show that this trend is continuing as we are once again setting all-time record highs for activity, positive net absorption and new construction.
Activity for the Atlanta industrial market for the third quarter alone was over 24.6 million square feet, which beat the previous record for a single quarter by over 4.1 million square feet. Adding the third-quarter numbers for activity to the previous three quarters, Atlanta has posted a new record high for a four-quarter period with over 82.2 million square feet of activity. This breaks the previous four-quarter record for activity by over 6.4 million square feet.
Sim Doughtie of King Industrial Realty/CORFAC International
It would certainly be logical to conclude that the net absorption numbers would be robust and positive as well for the same time periods, and you would be right. Atlanta set another record for positive net absorption with over 12.1 million square feet, which was over 2.8 million square feet higher than the previous record.
When you add the third quarter numbers to the previous three quarters, you will see again a new record high for a four-quarter period with over 32.7 million square feet of positive net absorption, breaking the previous record by 3.4 million square feet.
One thing to note here is that following the Great Recession, the Atlanta industrial market has now seen positive net absorption for 36 out of the last 37 quarters.
New construction citywide
In the third quarter, Atlanta set a record for new construction for a single quarter with over 14.3 million square feet of new construction, which beat the previous record for a quarter by over 2.1 million square feet. This also sets a new record high for a four-quarter period with over 43.8 million square feet of new construction, more than 6.8 million square feet above the previous record.
The breakdown for the 43.8 million square feet of new construction this past year was 8 million square feet for build-to-suit projects (18 percent), and 35.8 million square feet for speculative construction (82 percent).
Surprisingly, the Atlanta market isn’t even close to overbuilt, despite the record level of new construction. Over the past seven years, the Atlanta industrial market has produced over 170 million square feet of new construction, and over that same time period the availability rate actually went down from 15.2 percent to 10.8 percent.
The record demand we have been experiencing in the Atlanta industrial market has been going on a good seven-plus years, and one of the primary drivers of this record demand has of course been e-commerce.
The demand for e-commerce facilities has changed in many ways how new warehouse buildings are and have been constructed, with initially a need for 36-foot clear heights. This pretty quickly became a 40-foot or higher requirement with extra parking for employees in some cases, and in almost all other cases, extra parking for trailer storage. The warehouse buildings to meet this need did not exist, so they had to be built.
The demand for e-commerce space has driven the size of the required spaces larger in size to where we did a whopping 174 transactions that were over 100,000 square feet or above during the last four quarters. The total square footage of those deals was over 45.3 million square feet, or 55 percent of the total square footage for activity for the past year.
The overall breakdown for the completed deals was as follows: 108 deals between 100,000 and 249,999 square feet; 47 deals for 250,000 to 499,000 square feet; 10 deals between 500,000 and 749,999 square feet; four deals between 750,000 and 999,999 square feet; and six deals 1 million square feet and above.
Supply chain disruptions
The Atlanta industrial market has been experiencing record-breaking numbers, so at this point is it going to continue, or are there forces at work that could slow down this amazing historic growth?
Economists, developers, members of CORFAC International, members of SIOR and others have affirmed that manufacturers around the world are having a hard time getting the components that they require to produce their finished products to ship overseas to their vendors and customers.
Many companies shut down their manufacturing operations temporarily due to the COVID-19 outbreak. And restarting their factories has become problematic, not only due to a lack of necessary parts and components, but also due to a lack of labor to work in the plants. The Delta variant has not been much help either.
Next, the global supply chain has also had its problems with bottlenecks that have slowed down the delivery of shipments. Once the products finally do make it onto the ship, and once the ship arrives at the destination port, other problems have arisen.
For example, at the Los Angeles Port, there are more than 60 ships waiting outside the harbor to dock and unload their cargo. It used to take six hours from the time the ship docked until the containers were on a truck or rail headed for their next destination. Now, it takes five to six days for that to happen.
There is a lack of labor to handle the containers at the port, a shortage of truck drivers to deliver the containers to the warehouses and a shortage of warehouse space to store these latest shipments. The vacancy rate in Los Angeles is reportedly less than 1 percent.
The Port of Savannah is having similar problems with delays and currently has over 20 ships waiting outside of the port to dock. They do not have the lack of warehouse space issue like in Los Angeles because Atlanta is the inland port for Savannah, and the market has two rail lines (CSX and Norfolk Southern) that send trains to Atlanta intermodal yards every day.
Trucks also leave the Port of Savannah every day headed to Atlanta. At the present time, the Atlanta industrial market has over 88.9 million square feet available, so we have warehouse space where products can be shipped.
All of these problems and issues that we are currently seeing with the manufacturers and with the supply chain itself have caused an imbalance in supply and demand, which has caused delays and prices to increase. For example, a year ago the cost of a shipping container was approximately $3,000. Today, that same container now costs about $15,000.
Increases in fuel costs to both manufacturers and to shipping have also contributed to higher inflation, thus higher costs for goods. A lack of an adequate workforce and the massive expansion by Amazon — which pays in many cases more than $20 per hour — has caused wages to increase, thus increasing the final cost to the consumer.
A note here is that by mid-year of 2021, Amazon had already completed 77 transactions for approximately 33.1 million square feet, which is an average of almost 430,000 square feet per deal. The transactions are increasing in size to handle the surge and demand due to the e-commerce market.
The issue of recruiting, vetting, hiring and retaining new employees is not a new problem. There was already a problem due to a lack of labor prior to the pandemic shutdown when the unemployment rate was below 4 percent.
The pool of available workers was small at that time, and I was told by a client that the pool was even smaller than that due to the fact that 50 percent of the applicants they interviewed could not pass the drug test or the background check.
In addition, builders and developers are also experiencing delays in receiving the products and components that they need to build their projects, and they have also experienced increasing prices on everything from steel to roofing systems.
The cost of steel has risen over 40 percent in just the past year. I have been told that, at the present time, roofing manufacturers will not even quote a price, and that they will not guarantee a delivery date as well.
We still expect retail brick and mortar footprints to continue to get smaller as more and more people order their products online, and we believe that e-commerce will continue to expand over the next few years.
As long as these issues regarding manufacturing and the supply chain continue, it will have a negative impact on the overall industrial market, but I believe that this is a temporary bubble that will be solved going forward.
Trucker shortage
Lastly, a couple of solutions that I feel would be appropriate to help solve some of these supply chain issues would be first for the shippers to use other ports, like the Port of Houston for instance, to help to alleviate the current bottlenecks at the busiest ports.
Secondly, the trucking industry has been experiencing a shortage of truck drivers for quite some time now as the older drivers retire or work elsewhere. They are not being replaced, because the younger generations do not appear to want to drive trucks for a living.
So what’s the solution? Why don’t we have truck drivers from around the world submit their applications. We would require that they speak English and of course, they would need to be tested and/or trained to insure that they were qualified for the job and not a safety hazard to others. This could be a win-win opportunity to solve the shortage of truck drivers by recruiting immigrants to the United States with their immediate families, and they would pay taxes.
— By Sim Doughtie, SIOR, CCIM, President of King Industrial Realty Inc./CORFAC International. This article originally appeared in the October 2021 issue of Southeast Real Estate Business.