As Vacancy Soars In Atlanta's New Warehouses, Investors Smell Opportunity

Robinson Weeks Partners, the firm best known for redeveloping the former Army base Fort Gillem into a sprawling industrial complex, has never raised a fund to buy existing warehouses. Until now.

Atlanta-based Robinson Weeks closed its fifth investment fund last month, raising $150M to acquire existing warehouses across the Southeast and Texas, CEO David Welch told Bisnow. Those markets are seeing millions of square feet of new warehouses deliver completely vacant as demand has dropped, a sign that discounts might soon be had.

“I think today, you're going to have some various needs for owners to sell buildings, who may not needed to have in the past,” Welch said. 

While Robinson Weeks is only targeting buildings with leases in hand, the firm's new fund is indicative of how quickly the industrial market has cooled.

Industrial vacancy in Metro Atlanta rose 70% between the end of 2022 and the fourth quarter, according to a CBRE report. The rate stands at 7.7%, the highest since Q3 2017. Accounting for sublease space on the market, 11% of the region's industrial space is available.

“The increase can be attributed to the delivery of unoccupied speculative developments in the past quarter,” CBRE Associate Research Director Scott Amoson wrote in the report. “Sublease availability, while still only 1.6% of the market as a whole, continues to show steady upwards movement and reached an all-time high to end the fourth quarter.”

After the region's inventory expanded by a record 36.3M SF last year, a further 20M SF of warehouse space is still under construction, according to CBRE. In Q4, 94% of the new deliveries were vacant upon completion.

The increase in deliveries has coincided with a slowdown in tenant demand. Leasing activity fell 23.2% from 2022 to 2023, according to CBRE. Tenants absorbed 8.6M SF of Metro Atlanta warehouse space last year, the least since 2012, and net absorption fell 95% year-over-year.

Atlanta has been among the markets hit hardest by the slowdown in industrial activity, but warehouse developers nationwide have been feeling the lack of demand and increased competition between buildings.

The declining performance has started to impact property values.

Capitalization rates on industrial real estate, or the value an investor puts on in-place rents, rose from less than 4% to more than 5.5% between the first quarters of 2023 and 2024, according to a December CBRE report. And values aren't likely to stabilize until the middle of this year, CBRE predicted.

That dynamic has opened a window for investors to grab warehouses and distribution hubs at lower prices than were seen when sales volumes hit record highs in 2021 and 2022.

“I think we're going to get some higher yields, higher returns than we would have a year ago,” Welch said. “It's a new set of return expectations. In the Covid years, people made some outsized returns. Those were just outsized returns that were just not sustainable.”

Welch said Robinson Weeks' acquisition fund was raised from a pool of high net worth and family office investors who were seeking more conservative returns as industrial real estate values feel the negative impacts of rising interest rates. 

Warehouse owners, especially those facing expiring leases in the near term, are coming to terms with the fact that values have fallen from the height of the pandemic-fed industrial boom as tenant demand slackens across the region. 

“I think the Fed, and an election year coming up … it just kind of froze the market and people paused,” NAI Brannen Goddard President Nathan Anderson said. “If someone can pause a decision, they’re going to pause it with what’s going on in the market.”

There aren't just fewer tenants in the market than in recent years. They are also searching for smaller spaces. 

Some 64% of leasing activity in 2023 involved tenants inking leases for 50K SF or less, according to an Avison Young report. That is a major shift from 2021 when more than 70% of deals were landing in spaces larger than 50K SF.

Shoumic Khan, the vice president of industrial at Bull Realty, said demand has been greatest with tenants seeking 10K SF or less. 

“The mom-and-pops are definitely fighting a lot for the smaller spaces,” Khan said, adding that higher interest rates are making companies more sensitive to rental rates, especially on the bigger, newly delivered spaces. “Some of these large spaces, they're asking mid-$7s to low $8s [per SF]. That’s a big difference. That’s thousands and thousands of dollars added to their expenses.”

While activity has slowed, Anderson said he is seeing companies begin to kick the tires on big-box warehouse space again, especially with suppliers looking to locate near some of the state’s newest manufacturing plants. This month, solar panel maker Qcells leased 830K SF at the 1.2M SF 1380 Cass-White Road distribution center owned by MDH Partners, Anderson said.

“There are big blue-chip companies who are finally coming out and looking at space,” he said. 

While Welch said developers “got a little ahead of ourselves,” Robinson Weeks raised a $150M fund late last year, still focused on new development opportunities throughout the Southeast.

Welch said there are still tailwinds pushing industrial demand, including the surge in domestic manufacturing, the continued growth in e-commerce and companies adding storage to avoid another supply chain crisis like that experienced at the height of the pandemic, which stretched the limits of the just-in-time delivery model.

Robinson Weeks just broke ground on a 650K SF logistics facility called Charleston Global Crossing near the Port of Charleston, South Carolina, completely on spec, Welch said. 

“The fact that we are all getting used to getting our stuff in two days or less, you need a lot of space to hold that inventory,” he said.