Industrial's Strength May Slip In 2019, But Few Have Any Real Worry

Atlanta's zealous industrial developers still did not overshoot tenants' appetite for industrial space again last year.

Despite unleashing more than 15M SF of new warehouses across the metro area, the amount of space leased by tenants again exceeded new supply, according to data compiled by Transwestern.

While moderately down from 2017, industrial tenants still managed to absorb 18.1M SF last year, continuing Atlanta's story as one of the hottest industrial markets in the nation.

“This is the best market I've ever seen, period,” Pattillo Industrial Real Estate CEO Larry Callahan said. "And I've been doing this for 33 years."

The 10 biggest leases executed in 2018 accounted for 6.5M SF alone. These deals include Amazon's 500K SF lease at Jefferson Distribution Center, HD Supply at Gillem Logistics Center and the third-party logistics company Saddle Creek, which secured the largest industrial lease early in 2018 at Southwest 85 Logistic Center.

South of the city and along the northern stretches of Interstate 85 into Gwinnett County and beyond dominated the activity. That has been the story for the past few years as tenants look for locations that straddle not only metro Atlanta's population, but are within driving distances to other major cities along the East Coast, Callahan said.

“The e-commerce trend just continues with the big-box buildings,” Avison Young principal Brent Weitnauer said. “The question will be how much further out are they willing to go? Do you still continue to have the demand for those 1M SF buildings?”

For now, one of the answers to those questions rests solely on labor, and the fact that warehouse tenants can still manage to find a good pool of workers to fill their operations in Metro Atlanta.

“Labor is becoming as important, if not more important, than transportation [infrastructure],” JLL Executive Vice President Wit Truitt said. “And labor is becoming harder to find or even harder to keep.”

Truitt said that the access to workers is driving many tenants to look along the Interstate 85 corridor where, on the southern and northern ends of the metro-bisecting highway, there are still a lot of available workers.

Despite the good times, there are gathering headwinds — from the ongoing trade war with China to Wall Street's sudden volatility — that have some experts concerned whether Atlanta's sustained strength will remain. Since 2016, the metro area has posted double-digit absorption gains every year.

Ferdinand Seefried, the founder of Seefried Properties, said the trade war is probably destined to be resolved at some point in 2019, which would spur activity again. His biggest fear, though, is the risk we may not be seeing yet.

“I'm more concerned about suddenly a black swan event [happens], particularly in the geopolitical arena,” Seefried said.

He noted mounting tensions in the Middle East, growing concerns about Russian militarism and economic problems in some South American countries.

“That could eventually derail the economy. If America is drawn into a war-type situation, then all bets are off for a while,” he said. “There are a lot of areas where there's political stress right now.”

What few were really concerned about was the dreaded “R” word hitting the economy. Currently, the U.S. is on track to have the longest economic expansion since the end of World War II, and many are scouring the data for signs that the country may be entering into a recession.

Some concede those fears may reduce the amount of space leased by tenants this year. Weitnauer also said he is seeing more developers growing more cautious, especially in light of mounting construction costs.

“Activity remains strong,” Weitnauer said. "I would be surprised that it remains at that same type of pace."

“I'm not staying up at night worrying about whether we're going into another recession,” Callahan said. "I'm not obsessing with the date of a recession. The bigger concern in real estate is the length and depth of the recession. The last recession that we had was horrible and it's one of the reasons that people are so goosey and have been for awhile. But the odds are very good that the next recession, whenever it does come ... are that it's likely to be shallow and short.”

Truitt said even in a recession, the continued evolution of consumers to shopping more and more online is having a more paradigm effect on industrial real estate.

“E-commerce will boost the industrial going forward for the next several years regardless whether we enter a recession or not,” he said. “That's the backstop for our industrial sector.”