Atlanta Industrial Market 'Sucking Wind' As Vacancy Surges To 9%

Hello Fresh opened its first distribution center in the U.S. in 2020 in a 210K SF warehouse 40 miles south of Downtown Atlanta. It was far from alone in responding to a pandemic-fueled surge in demand for delivered goods and groceries.

But this week, Hello Fresh ceased operations at Rooker Co.'s 510 International Parkway as its sales plummeted. The decision comes as demand for warehouse space across Metro Atlanta has sunk, sending industrial real estate vacancy to its highest point in a decade.

There is more than 63.5M SF in distribution and warehouse space available in Metro Atlanta, amounting to a 9% vacancy rate at the end of June, up from 5.5% at the same point last year, according to a Savills report.

It's the highest vacancy rate since Savills started tracking industrial vacancy rates in Atlanta in 2018, said Ally Juratovac, a research associate for the firm. The last time CoStar tracked industrial vacancy above 9% was in 2014.

The recent performance is a far cry from the heyday of the past few years that area industrial landlords and developers enjoyed when companies scrambled to fill warehouse spaces.

Starting last year, as record levels of construction began to hit the market as interest rates started to cool the economy, a hangover began to creep in. It's only grown worse.

“I would say Atlanta is kind of sucking wind compared to the rest of the Southeast,” Avison Young Senior Associate Subham Nandy said. “I see a lot of tenants sitting on their hands. I think we got a little too overbuilt compared to other markets that were a little more land constrained.”

Aside from Hello Fresh, a handful of companies that occupy warehouses initiated major closures and layoffs in Georgia this year.

DHL laid off 211 employees and shuttered its operations at 1555 Oakley Industrial Boulevard in Fairburn and at 2018 Avalon Parkway in McDonough, according to a Worker Adjustment and Retraining Notice filed.  

Commercial vehicle equipment maker ZF Active Safety shuttered a plant in Flowery Branch, moving operations to Mexico and displacing 365 workers. Swissport Cargo Services laid off 235 employees at its 4300 ASR Road facility in Atlanta.

Linen manufacturer 1888 Mills ceased operating its Griffin plant at 375 Airport Road, displacing 180 workers. FedEx Supply Chain stopped operating at 6720 Oakley Industrial Blvd. in Union City, laying off 326 employees, after its customer moved operations to Jackson, Georgia.

“I think a lot of those tenants gobbled up a lot of space during the height of the pandemic, and now they have to let some go,” Lee & Associates principal Cori Nuttall said. “When there are higher interest rates, and higher material costs and higher labor costs, then there has to be a natural tightening.”

There is still 22M SF of industrial space under construction, which would increase the total inventory in the region by 3%. While that is below the 29.6M SF under construction at the same point in 2023, it still represents a glut coming to the market as companies adjust their forecast for how much warehouse space they truly need.

New activity isn’t helping to fill the excess warehouse space. 

Tenant demand dropped significantly in the second quarter, with absorption tallying just 300K SF for the entire metro area, a sharp decline from 4.5M SF during the same period last year. Leasing activity was down nearly 11% year-over-year to roughly 12M SF, according to a Cushman & Wakefield report. 

Since the fourth quarter of 2023, total available warehouse space — defined as space that is available for rent whether a tenant is occupying it or not — has hovered at 29%, a level not seen since before the pandemic, according to Savills. 

Savills' report cited new warehouse supply as the main reason for the jump in the vacancy rate. But Sim Doughtie, president of King Industrial Realty and a more than 40-year veteran in the industry, said tenant inactivity due to election-year jitters and economic anxiety has had a greater impact.

“At this point, I don’t think the new space coming on the market has a lot to do with it,” Doughtie said. “All the Fortune 500 companies are not doing the big deals right now. They’d rather wait.”

GXO Logistics claimed the largest lease of the quarter, taking all of 2201 Thornton Road, a 734K SF warehouse in Lithia Springs, according to Savills.

Doughtie said GXO's lease was among six deals that exceeded 500K SF in the quarter. Not a single deal reached the 1M SF watermark size.

“When you look at the year before, there were 21 deals done that were 500K SF or more,” he said, including a number of 1M SF big box leases that seemed to be a dime a dozen since the pandemic. 

Despite the major slowdown to this point of the year, local players predicted an improvement on the horizon. Doughtie said that while the Federal Reserve has defied the odds on cutting the interest rate, he expects it to do so at some point this year, which should help spur industrial leasing activity in 2025.

“Q2 was a bit of a soft start, but the last 60 days have been robust,” Nuttall said, adding that she expects absorption to pick up by the end of the year. “I don’t think the narrative is as dire as that uptick [in the vacancy rate] suggests.”