Atlanta's industrial real estate riding strongest market in a decade as development boom continues - Atlanta Business Chronicle - Finding Family-Friendly Attractions In Georgia
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Atlanta’s industrial real estate riding strongest market in a decade as development boom continues – Atlanta Business Chronicle

Atlanta’s industrial real estate riding strongest market in a decade as development boom continues – Atlanta Business Chronicle

Driven by the e-commerce and distribution business boom, Atlanta’s industrial real estate sector finished 2017 with its best performance in a more than a decade, and experts are bullish on 2018.

According to Newmark Knight Frank’s (NKF) Research, 2017 vacancy fell to a 10-year low of 7.4 percent while annual net absorption climbed to a 10-year high of 18.7 million square feet. Rent growth also rose sharply, led by a 48.1 percent increase for general industrial properties since 2007. In fact, the average asking rent across all property types reached $4.83 per square foot on a triple net basis, the highest level in 15 years.

Given the market’s trajectory, experts say tenants nearing the end of a mid- to long-term lease may be in for sticker shock.

“Tenants should thoroughly assess every option before committing to any renewal,” said NKF Senior Managing Director Dave Watson.

Warehouse fundamentals positive

With warehouse demand totaling 11.7 million square feet in 2017, the market demonstrated its fifth consecutive year of net absorption over 10 million square feet. The warehouse vacancy rate that peaked at 16.1 percent in 2010 has declined steadily despite the delivery of more than 46 million square feet since then. Last year closed at 7.6 percent vacancy with the average warehouse asking rate at $4.18 per square feet, which was up 8.6 percent from 2016 and 13.6 percent over the past 10 years.

Development holds strong

In 2017, 43 new buildings added 16.4 million square feet (2.6 percent) to Atlanta’s industrial inventory. Those new properties – evenly split between general industrial and warehouse/distribution – were 41.2 percent pre-leased at delivery.

With approximately 19 million square feet still under development, Atlanta will see the largest amount of industrial space delivered in over a decade. Only six of these 37 properties have any pre-leasing, but the market has shown an appetite for new space. Almost two-thirds of the projects are classified as warehouse/distribution with an average size of 573,000 square feet.

Tenants need more space

Tenants have been demanding larger warehouses since 2010, and industrial developers have delivered. Of warehouses over 200,000 square feet built in the past eight years or currently under construction, twice as many average 650,000 square feet than properties built prior to 2000. The ceiling height of new warehouses, though, can have major impacts on the infrastructure that a distribution tenant/user may need. Forklifts and other machinery may not easily work if the ceiling height is over 40 feet, preventing some users from targeting a smaller space with a higher ceiling.

Investment and leasing activity strong

Investors committed nearly $1.5 billion to Atlanta’s warehouse market in 2017, the fourth consecutive year with over $1 billion in volume. While this was off from the $2.2 billion invested in 2015, it was the third-highest total since the recession.

More than 20 leases were signed during 2017 for over 200,000 square feet – including three deals each over 1 million square feet. Over 70 percent of those transactions landed in the airport/south Atlanta submarket. Half of all of the larger leases signed represented new-to-market tenants, further evidence of the strength in the marketplace.

“It’s a landlord’s market, so expect to see rent growth on renewals with fewer alternatives available in the market for tenants,” said Watson.

Forecast

With 19.3 million square feet in the pipeline and large tenants’ actively seeking space, property owners remain bullish on the Atlanta industrial market.

“E-commerce and 3PLs will continue to drive this economy, but bread-and-butter industrial users ranging from 20,000 to 100,000 square feet will see growth and expansion as well,” said Watson.

New development will likely fall from its torrid pace over the past three years, but hold above average due to the extensive access to interstates, airports, railways and consumers that the city provides. As available land for new development pushes construction further from I-285, tenants will be more likely to absorb existing product. Expansion at the Georgia ports of Savannah and Brunswick will also create needs in the Atlanta market, especially around Hartsfield-Jackson Atlanta International Airport.

While e-commerce has driven needs over the last two years, several national retail chains have closed their distribution centers within the metro Atlanta area, providing large warehouse spaces available at a lower price than new construction. These types of opportunities will likely continue to occur given the recent store closures announced by big-box retailers.

Learn more about Atlanta’s strong industrial market and development boom from Newmark Knight Frank.

Marianne Skorupski is research director at Newmark Knight Frank in Atlanta, where she supervises the company’s regional market analysis.

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