Q2 2012 Atlanta, Georgia Industrial Market Trends

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Q2 2012 Atlanta, Georgia Industrial Market Trends

Atlanta’s industrial market has thrived on strong fundamentals—a diverse, high-growth local economy (the pillar of the Southeast), strong population growth and associated residential development, and vast supplies of affordable developable land. While some of these advantages have dissipated under the weight of recession, others have not—and the long-term potential for the market, even with slower economic growth, remains formidable.

The latest trends speak for recovery. Net absorption in both the large 332.4-million-square-foot warehouse/distribution market and the 50.3- million-square-foot Flex/R&D sector was substantially positive during the first half of the year and, despite reports of a leasing slowdown in second quarter, was greatest for both sectors during that period. While elevated, vacancy rates are declining persuasively and positive growth has returned to rents. Recent and current construction, subdued overall, has remained confined for the most part to single-tenant projects, some of which—those for Georgia Pacific, Clorox and General Mills—are of major scale. While a new cycle of speculative development, accordingly, is not on the near-term horizon, one substantial spec project was underway per the date of this report. Interestingly, meanwhile, Atlanta has enjoyed significant recent success as a growing center for high-tech business and related real estate development. The growing role played by data center business and development is described in Special Real Estate Factors and elsewhere in this report.

OCCUPANCY


Historically speaking, embedded confidence in the economy’s ability to generate demand for industrial real estate product encouraged developers to build in the face of high vacancy. Indeed, Reis has not reported a single-digit industrial vacancy rate since the 1990s. The recession, naturally, only piled on additional empty inventory. Thus the vacancy rate for the local warehouse/distribution market peaked at 17.5% during third quarter 2010. The market, however, has since turned the corner. With more positive than negative net absorption, the rate in this sector had descended to 16.2% by the end of second quarter 2012, a drop of 70 basis points for the period and the year over year. The virtual lack of new supply deliveries year-to-date, meanwhile, contributed to the pace of descent. However, with supply deliveries expected to pick up by year-end even as demand slows, the warehouse/distribution market vacancy rate could add a few basis points in the quarters ahead. The long-term descent, however, will not likely be derailed.

As is typical for industrial markets nationwide, vacancy in the local Flex/R&D sector runs higher than vacancy in warehouse/distribution. Demand in the former, meanwhile, also has increased. Reis put second quarter Flex/R&D vacancy at 19.2%, down 90 basis points from the quarter before, down 130 year over year. A small increase is expected for this sector for the remainder of the year as demand slows.

SUPPLY AND DEMAND


Although the time is not yet right for the resumption of vigorous speculative development, there has been no shortage of large bulk and manufacturing build-to-suit projects for a major national corporate client base. Thus a 1.1-million-square-foot distribution facility for Clorox and a 420,000-square-foot manufacturing facility for SANY America completed construction early last year and distribution centers at 900,600 and 500,000 square feet were underway per the date of this report. In addition, a 1.0 million-square-foot e-commerce distribution center for clothier Carter’s Inc. opened in Atlanta’s Northeast submarket in June while a 1.0-million-square-foot manufacturing plant is in planning stages for bioscience firm Baxter International in the far eastern suburbs. In addition, notes Jones Lang LaSalle (JLL), ConAgra, Restoration Hardware, and McMaster Carr are searching for 1.0-million-square-foot facilities; Dish Network is looking for up to 750,000 and Eastern Bell is looking for as much as 500,000 square feet (see the Submarkets section for more information on these and other significant projects). Other large users are in the market for space or land as well. Demand for large spaces, accordingly, is strong.

By Reis’ count, the 1.43 million square feet of warehouse/distribution sector space that completed construction all told in 2011 was met by a near-equivalent net absorption total. First half 2012 followed with no significant new supply deliveries and net absorption at fully 3.5 million square feet, 2.3 million of which belonged to second quarter. While it cannot in itself be seen as a wholesale revival of speculative development, for now, a 650,000-square-foot spec distribution center is underway for completion later this year at Riverside Business Center in west suburban Lithia Springs. And JLL sees as “likely” the start of a new spec project in the South submarket before the end of the year. Meanwhile, huge volumes of warehouse/distribution space wait in planning and proposal stages.

Atlanta’s role as a traditional industrial market has broadened as a result of the increasing interest in the area on the part of high-tech business, including bioscience (Baxter, for example) and data center business. The enhanced local presence of Google and Twitter also are cases in point (see Special Real Estate Factors). Reis reports first half 2012 Flex/R&D space net absorption at 371,000 square feet. The total for second quarter alone was 421,000. No space belonging to this category was under construction metrowide per the date of this report. Development of a couple of major technology business parks is moving forward in the western suburbs, however. The Flex/R&D market is concentrated most heavily in areas of the suburban north, including Alpharetta.

RENTS


Measured by the year, losses in average rents in the warehouse/ distribution market in 2010 and 2011 have been followed by positive growth in 2012. Gains, however, have been modest and unsteady. Thus, observes JLL, “Tenants in a position to make deals still benefit from a soft market where concessions and pricing remain in their favor.” At $3.47 psf and $3.02 psf, average asking and effective rates reported by Reis for warehouse/distribution space for second quarter were up 0.9% and 1.0%, respectively, since year-end (with all the gains occurring during the latest quarter). Gains of similar proportion are anticipated for the year’s second half. Note as well the relative affordability of Atlanta’s rates alongside national averages—$4.69 psf and $4.23 psf, respectively.

At $5.91 psf and $5.10 psf, asking and effective averages for Flex/R&D space were up 0.2% and 0.6%, respectively, for the latest quarter following nearly identical rates of loss the quarter before. These rates, too, are low by national averages for the product type.