Contact Us

Atlanta Hits New Record For Industrial Construction While Demand Is Holding Steady

Industrial developers delivered nearly 9M SF of new warehouses in Metro Atlanta between July and September, the most new construction completed in a quarter in the region's history.

Now developers just have to finish the other 45M SF under construction as demand is slowing under economic pressures.

Developers still have a pipeline of more than 40M SF of industrial space slated for Metro Atlanta.

Atlanta’s industrial bull market since the pandemic, which fueled a spike in online shopping and the sudden need for lots of warehouse space across the nation, created a robust pipeline of new development as companies raced to build out their logistical networks.

Last quarter, more than 50M SF of industrial projects were under construction, the largest volume in the history of Metro Atlanta, according to data from Avison Young. 

Developers have delivered 21.5M SF of industrial space so far in 2022, and 71% of the spec space has been leased, according to Cushman & Wakefield. The firm projects that developers will deliver another 18.2M SF by the end of the year, which would make 2022 the most prolific year for industrial development in Atlanta history.  

Despite the record pace of construction, more space has been leased by tenants than added to the market, adding up to 5.5M SF of net absorption in Q3, according to JLL.

It is a sharp deceleration from the second quarter, when tenants absorbed 11.7M SF, the most of any U.S. city, according to C&W, but is roughly flat from the third quarter of last year, when tenants absorbed 5.8M SF, according to Lee & Associates.

With so much new space being delivered and continued tenant demand, asking rents hit a new record, eclipsing $6 per SF for the first time after rising 33% year-over-year, according to C&W.

“The market is moving so quickly that many developers and owners will not quote rates until [requests for proposals] are sent,” JLL senior analyst Harriet Westlake wrote in her third-quarter report

While a glut of space is still in the pipeline, few brokers see any dire warning signs that the market is about to reverse course, especially as vacancy rates stay below historical norms, said Sara Barnes, Avison Young’s Southeast region lead for insight and innovation.

“They still seem to think the pipeline of tenants is still good,” Barnes said. 

Leasing activity has slowed from historic highs, dropping from 14.7M SF in the second quarter to 6.6M SF in the third, Barnes said. So far this year, companies leased a total of 39.1M SF, down slightly from 42.3M SF during the same period in 2021. Avison Young only counts new leases, not renewals, in its activity figures.

Global logistics provider Kuehne+Nagel inked the largest lease in the quarter with 1M SF at Gardner Logistics Park, according to Lee & Associates, followed by Dollar General’s 712K SF lease at 500 Business Center Drive and retailer Conn’s HomePlus' 706K SF deal at Palmetto Distribution Center, all of which are in South Atlanta.

The development pipeline on new deals, while robust, may be tempered by increasing borrowing costs.

Some industry experts sounded the alarm earlier this year that developers were on the verge of overbuilding nationally.

But Barnes said the leasing activity will be more than enough to offset new construction and keep Atlanta absorption in the black for 2022. 

“With that much leasing activity occurring, I think we will still stay positive,” she said. “Will it be a record? No. But still very strong and healthy. My agency industrial brokers say if they have a space come available, they still have people fighting over it.”

Greg Boler, the managing director for the Eastern region of Bridge Logistics Properties, told Bisnow that the spike in interest rates and the growing pessimism about the U.S. economy due to rampant inflation will slow future development. 

With interest rates going up more than 2% this year, speculative developments will be unattractive unless yields stabilize to offset the timeline that borrowing costs exceed rental revenue, a phenomenon known as negative leverage, Boler said. That psychological hump is delaying new construction and crimping the flow of warehouses trading hands.

Sales volume dropped from $1.24B in the second quarter to $789M in the third, according to Lee & Associates. Boler said cap rates have been on the rise in Metro Atlanta from their historic lows of around 3% to the mid-to-high-4% range. 

“The wheels started falling off in June,” he said. “Buyers are essentially saying to sellers that they need to be lower.”