Latest Shift in Atlanta’s Industrial Landscape: Mid-Sized Deals are All the Rage

While retail and office have had to adjust to a COVID-19 world, industrial has been the beneficiary. E-commerce, supply chain and last mile delivery are all the rage. But what has really gotten economic development leaders, elected officials and the media excited are the massive warehouse deals in cities like Atlanta that have created headlines and driven investor capital to industrial.

Atlanta didn’t even truly get into the big-box industrial development game until 2004. From 1960 to 2006 there were just 13 buildings larger than 1 million square feet constructed in the metro area, but 11 were build-to-suits for users such as JC Penney, Kmart, Publix, Home Depot and the General Services Administration. Only Duke Realty (2004) and Majestic (2006) developed speculative properties spanning more than 1 million square feet.

Pat Murphy, Cushman & Wakefield

Between 2006 and 2015, there were 11 buildings more than 1 million square feet added to the city’s inventory, with seven of those south of Interstate 20, three in the Northeast 85 corridor and one on the Interstate 20 West Corridor.

As Atlanta’s economy roared back in 2016, the market exploded with 17 new big-box facilities in just five years.
While prior to 2015 the field of players constructing these big-box buildings was largely confined to the likes of Duke Realty, Majestic and IDI, the past five years have seen a much larger set of developers going big. Developers including Scannell Properties, PNK Group, Panattoni, CRG, Robinson Weeks, Core5, Taylor Mathis and Exeter have all delivered large industrial buildings.

There didn’t seem to be an end to the number of tenants that could take down more than 1 million square feet. From 2015 to 2020, the market was awash with deals, usually known by project code names such as Bruin, Charlie, Eagle, Embark, Fireball, Rebound and Twin Peaks. Smuckers, Google, Williams-Sonoma, Variety Wholesalers, Uline, HD Supply, Lowe’s, Drive Medical, and, of course, Amazon, all did deals spanning 1 million square feet or larger.

Since early 2019, a notable shift has been underway. Big-box deals in the Northeast 85 submarket seemed to be slowing, and suddenly there were multiple options for tenants seeking 1 million square feet or more, but dwindling tenants.

This caused an adjustment in the thinking of developers and investors. Just a few years ago, not many investors or developers would have entertained splitting their buildings for fear they would be stuck with a remnant suite that could not be leased. However, the trend on deal size has been moving down, making this a low risk gamble.

Since 2018 the number of large leases of 600,000 square feet or more has remained fairly constant in Atlanta in the six to nine deal range per year. However, the number of leases between 200,000 and 600,000 square feet has jumped from 26 in 2018 to 38 in 2019 and 46 last year, a 77 percent increase over that same period.

Most of the new requests are seeking smaller footprints between 100,000 and 500,000 square feet, according to Farrell. The pandemic accelerated the growth of e-commerce — particularly in grocery and non-durable goods — and these operators are focused on ever-faster delivery.

“The emphasis on smaller footprints allows for more flexibility in uncertain economic times, closer proximity to growing customer bases, and reduced risk for investors,” says Farrell. “So while we are seeing fewer inquiries for 1 million square feet, that decline is more than offset by increased demand for sites to accommodate 500,000 square feet or less.”

This shift is most evident in Henry County. Located just southeast of Atlanta, Henry County has been home to many big-box developments over the past 20 years. As the last stop from the Port of Savannah before hitting the metro area, Henry County has served as an attractive location for retailers and consumer products firms that require a regional hub to serve Georgia, the Carolinas and North Florida.

An aerial survey of Interstate 75 through Henry County shows numerous buildings larger than 800,000 square feet that have attracted firms including Home Depot, PVH, Kimberly Clark, Toys “R” Us and Whirlpool. However, 2020 brought a shift to smaller deals.

“We have seen a shift in Henry County on project space requirements over the last few years,” says Josh Fenn, executive director of the Henry County Development Authority. “The requirements are for smaller type of product.”

The southern half of the metro area was still seeing its share of absorption, and buildings continued to go up. But in 2020, with the jumbo tenants slowing to a trickle or opting for build-to-suits (Goodyear, Five Below, Home Depot), developers that were holding out for a single tenant began to get impatient. In a sudden change of strategy, nearly all of the big boxes over 1 million square feet were being subdivided for smaller deals.

Pure REIT (which sold to WPT) split its building in McDonough for Horizon Group (462,000 square feet); PNK split its 1.1 million-square-foot building for Purple Innovation (529,000 square feet); Scannell split Locust Grove Logistics Center building for Radial (670,000 square feet); Artemis split its building on Interstate 85 South for Yamaha (517,000 square feet); Robinson Weeks split Gillem Logistics Center for Boeing (420,000 square feet), and on and on.

Chip Craighill with Cushman & Wakefield related in January of this year that a recent survey for 250,000- to 350,000-square-foot clients in the Interstate 75 South market resulted in seven options, all but one of which were large buildings that had been split, and the last option would have split a new building.

“From what I have heard, tenants are no longer seeking buildings in the 1 million-square-foot range anymore,” says Craighill.

Another factor influencing the renewed demand for smaller space is the growth of advanced manufacturing. Advanced manufacturing has been a buzzword that can mean different things to different people, but what nearly everyone agrees on is that it is cleaner than traditional manufacturing and requires skilled labor above the assembly plants of days gone by.

Fenn has seen it firsthand in Henry County.

“We continue to see demand for e-commerce and supply chain, but as manufacturers are looking to come back stateside or be closer to their clients and supply chains, Henry County has become more attractive,” says Fenn. “In 2020, Henry County saw a 20 percent increase for advance manufacturing requirements alone, with most being for under 500,000 square feet. We expect these trends to continue in 2021.”

Many in the industry believing the days of the large requirements are on hold for now, and the real business of industrial real estate will be the mid-size deals – those ranging from 200,000 square feet to 600,000 square feet. That, couple with the difficulty in finding sites that can hold 1 million square feet, has developers thinking smaller.

Nick Kittridge, president of the East Division for Prologis, has noticed that this trend isn’t ubiquitous. He says that Pennsylvania continues to build traditional stock of 750,000-square-foot and above buildings, but this past quarter, the size of construction starts in Atlanta seems to be ratcheting down.

“It’s worth keeping an eye on,” says Kittredge. “We have to wait a couple of quarters to see if it is truly a trend.”

Though many agree on the increase in smaller deals, some do not believe that change is related to demand for the big box buildings. Chris Brown, senior vice president at Duke Realty, is not convinced the demand for 1 million-square-foot buildings has decreased, but he does acknowledge the significant increase in the smaller deals.

“My guess is there are still as many 1 million-square-foot deals as there ever was,” he said. “But we found ourselves with somewhat of a glut of buildings.”

Brown points to recent deals with Walmart and PVH, which took massive buildings. Even so, he agrees that there has been a jump in the smaller size range, and that is leading to more buildings in that smaller size range.

“Demand for smaller deals has really increased,” says Brown. “Going forward, there will be less supply [of 1 million-square-foot buildings] as people are focused on infill. You just won’t have the sites.”

That’s not completely true, however, as there are currently 19 proposed projects listed in CoStar Group ranging from 800,000 to nearly 1.6 million square feet, 16 of which exceed 1 million square feet. They are spread from Jefferson on Interstate 85 North to LaGrange on Interstate 85 South, and from Calhoun on Interstate 75 North to Forsyth (just north of Macon) on Interstate 75 South. Whether any or all these projects move forward will depend on economics.

Demand will continue to drive the size of industrial buildings, and in the near term, that likely means fewer large developments.

“The overall market is getting stronger,” says Kittridge. “At the same time, the sweet spot may be shifting. Not everyone needs a mega box.”

For now, it would appear the smart money will build and market to smaller deals, even if it means fewer headlines.

— By Pat Murphy, Managing Director, Industrial Agency Leasing at Cushman & Wakefield

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