Atlanta's Industrial Demand Slows As A Wave Of Spec Development Comes To Market

Even as developers build more warehouses than companies are taking up in Metro Atlanta, industry experts remain bullish that there will be plenty of demand to lease the 20M SF in the region's industrial pipeline.

Through the first half of 2019, tenants absorbed 5.3M SF in Metro Atlanta's 700M SF industrial market, according to an NAI Brannen Goddard report. During the same period, developers delivered 10.2M SF, showing the first signs that demand for warehouse space is not, in fact, infinite.

By most accounts, the year started with a whimper — a far cry from Atlanta's industrial market in the years since the Great Recession. During the first quarter, absorption tallied just 1M SF throughout all Metro Atlanta, the lowest quarterly absorption number since 2014, according to JLL.

Now, activity is gearing up, even as potential economic headwinds continue to threaten the market, industrial pros say.

“We think we're trending up. There's no concern for the future,” JLL Executive Vice President Wit Truitt said. “Consumer demand is still strong for products. The e-commerce market is still growing. It's almost in its infancy. Remember, industrial is the new retail, so we'll continue to benefit from that.”

The largest lease so far this year is with Stitch Fix, an online personalized retailer, which is planning to open a $50M-plus facility at Prologis' RiverWest Distribution Center in Lithia Springs that will employ 900 people.

Other big deals in the past few months include FedEx Ground's 500K SF deal at Clayton Commerce Center, Atlanta Bonded Warehouse Corp.'s 500K SF lease at I-20 West Distribution Center, US Elogistics Service Corp.'s 500K SF lease at 240 The Bluffs in Fulton Industrial submarket and SP Richards Co.'s 460K SF deal at Core5 Logistic's 440 Interstate Parkway facility in Lithia Springs.

Developers could be overshooting their mark. Over the next 18 months, developers are expected to deliver another 20M SF of new industrial space in Atlanta, according to NAI Brannen Goddard, most of which is speculative, meaning no tenants have inked any leases to prompt the construction.

“The one area of concern for the market is the amount of new development activity, which continues to proliferate, even as absorption and leasing levels have begun to moderate somewhat,” Colliers International officials wrote in a second-quarter report. “It is too early to know exactly how much of this will be leased upon delivery; however, it can be assumed an ample amount of vacant space will flood the market.”

Before this year, the surge of speculative development garnered little concern, especially in the face of a hungry tenant base restructuring their distribution networks with the e-commerce revolution. Since 2016, the metro area has posted double-digit absorption gains every year.

But a lot of that absorption has been thanks to companies taking huge chunks of warehouse space all at once, a pool of prospects that appeared to slow down earlier this year, Seefried Properties Senior Vice President Doug Smith said.

“I think in general, it's still been fairly active. I think what's slowed down are the bigger deals,” Smith said. “I just think that we had a great run. We did a bunch of deals and there was pent-up demand. I think that that just got satisfied and it probably just needs to recharge.”

Smith said tenants demanding anywhere from 50K SF to 150K SF are very strong at the moment, particularly among companies using Amazon as a platform to sell products.

“Just right now in Atlanta, the big-box market seems soft,” he said. "But all it takes is one or two deals and it's right as a tick again."

Some of the lethargy may be attributed to the one word that befuddles and intimidates corporate America: uncertainty. With growing noise of a possible recession, the White House's trade war with China and now a spike in energy prices due to an attack on a Saudi oil refinery, companies may be hesitant to make big capital decisions, Pattillo Industrial Real Estate President Larry Callahan said. But those concerns aren't likely to become crises in the face of the overall economic strength of the U.S., he added.

“The overall market still feels strong," Callahan said. "Like all strong markets, you can get things to happen that can be a concern. I think we will weather this storm and if there is a downturn it will be short and shallow."

There indeed may be hope that Atlanta will finish the year in a stronger position than it started. There are a handful of tenants in the market seeking at least 1M SF currently, including Goodyear Tire & Rubber Co., under the moniker Project Fireball, and aircraft maker Boeing, according to Colliers International Atlanta research.

JLL's Truitt said the firm still expects the Atlanta market to absorb upward of 15M SF by year's end, which should be enough to cover much of the new warehouse space sprouting in Metro Atlanta. And companies are still looking to open distribution hubs in Atlanta, with its growing population and highway access to other Southeastern cities for that last-mile delivery effort, according to Colliers.

"Companies such as Goodyear and Boeing, along with a number of unnamed companies working with the state of Georgia, are actively seeking large warehouses in the metro area,” Colliers researchers said in their report. “Tenant demand remains stable, which will help curtail some of the anticipated vacancy shock.”