Slowdown Deepens In Atlanta's Industrial Market, Outlook Dimmed For Rest Of 2023
Atlanta’s high-flying industrial real estate industry is falling back to earth as developers have fewer companies vying for space in the sprawling warehouses that have been popping up across the region.
Leasing activity during the second quarter was 6.5M SF, decelerating 1M SF from the first quarter and down from 13.3M SF in Q2 2022, according to CBRE. The 50% year-over-year drop-off was described by market watchers as a normalization after activity took off during the pandemic as consumers shifted to online shopping and the global supply chain seized due to the effects of the pandemic.
“A lot of the inefficiencies and bottlenecks which led to a lot of demand have begun to work themselves out,” said Blaine Kelley, the executive vice president of CBRE’s supply chain practice in Atlanta. "And that has had a direct impact on the demand side. These peaks and valleys have begun to level out a bit."
Despite the slowdown and a 40M SF construction pipeline, more industrial space is being taken off the market than added to it. There was 3.1M SF of net absorption in the quarter in the region, up from 2.8M SF in Q1 but down from 5.7M SF in Q2 2022, according to CBRE. The vacancy rate dipped from 4.5% in Q1 to 4.2%.
Prior to the pandemic, average annual absorption in Metro Atlanta ranged between 15M and 20M SF, CBRE Associate Field Research Director Scott Amoson said. In 2021 and 2022, the annual average shot up to 35M and 40M SF.
“I would say [demand] is returning back to its averages, which is a healthy thing,” Kelley said.
Broadrange Logistics signed the largest lease in the second quarter, claiming all 692K SF at Strategic Real Estate Partners’ International Commerce Center on Highway 140 in Adairsville.
Other major leases inked in the second quarter include Yongsan, which took 306K SF at 601 Logistics Parkway in South Atlanta; Titanium Plus Autoparts, which leased 216K SF at 2961 Gravel Springs Road in Buford; NVH Korea, which leased 234K SF at 381 Davis Lake Road in South Atlanta; and Boston Scientific, which took 207K SF at 11350 Johns Creek Parkway in Duluth, according to Savills.
The average size of industrial leases also shrank in the second quarter, according to CBRE. Companies leased an average of 43,500 SF, compared to 127K SF in the same period last year, Amoson said.
Bridge Investment Group Managing Director Greg Boler said rising interest rates have spooked companies from seeking larger amounts of space.
“A lot of users are now slow to make decisions because, obviously, those interest rates have affected their business decisions on new space,” Boler said. “During any type of slowdown or economic uncertainty, everybody really pushes pause.”
This demand contraction has some landlords who built sprawling warehouses that were being gobbled up by Amazon and other e-commerce companies looking to adjust their footprints and make room for more than just one tenant, Lee & Associates principal Cori Nuttall said. Tenants are also scrutinizing exactly how much space they need instead of leasing more under the premise they will grow into it.
“I know that some of their big boxes are sitting empty a lot longer than [landlords] anticipated. [Tenants are] concerned that there’s going to be economic fallout to their business overall,” she said. “Now they’re taking exactly what they need ... or a little less, perhaps.”
Despite huge move-ins expected over the rest of the year — including Kuehne + Nagel’s 1M SF build-to-suit at RiverWest Distribution Center in Lithia Springs and Sam’s Club's 1.1M SF warehouse at Gardner Logistics Park in Locust Grove — Amoson said he expects absorption to fall further the rest of the year.
“Our outlook isn’t as cheery on the absorption side,” he said. “Outside of those big ones, leasing activity is slowing. I doubt we’ll probably see 4M SF over the next two quarters.”
