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For Atlanta Industrial Investors, The Smaller The Better

Shallow-bay industrial space is far from the poster child of a modern warehouse. Instead of a giant square block of white-walled distribution space storing thousands of items, a shallow-bay warehouse is exactly like it sounds: a narrower building with rows of bay doors that stretch along its facade. 

It is, however, the poster child for the type of industrial property that investors want to buy, panelists said Tuesday at Bisnow's Industrial Southeast Summit. 

Avison Young's Jason Holland, Patterson Real Estate's Bill Mealor, Atlanta Property Group's Smith Haverty, Realterm's Arnie Capute and InLight's Matt DiLeo.

“There is a lot of institutional capital pursuing shallow-bay industrial,” said Bill Mealor, a senior managing director for Patterson Real Estate Advisory Group. “There is less appetite for bulk industrial, and construction is more difficult given the return on cost expectations and supply in many markets.” 

Shallow-bay industrial properties only make up 12% of the Atlanta Metro area’s total industrial supply of 737.5M SF, according to data provided by CBRE.

But unlike large-scale distribution centers, which have been the most popular product type for developers, shallow-bay buildings are more difficult to get local government zoning and approval, Atlanta Property Group partner Smith Haverty said.

“Even with where shallow-bay is pricing … you continue to see almost zero development,” he said onstage at Lake City Distribution Center.

That stands in stark contrast to the broader market. There has been a record amount of construction in the aftermath of the pandemic that is still hitting the market. Developers delivered 6M SF of new warehouses in Metro Atlanta in the first quarter, largely bulk distribution centers, and another 19.8M SF is under construction, according to new data from Savills

Those deliveries have pushed the vacancy rate for Atlanta-area industrial space up to 8.4% at the end of the first quarter, a steep increase from 5.2% during the same period in 2023, per Savills.

Despite all the new bulk space, companies have been gravitating toward smaller warehouses, especially shallow-bay buildings. Warehouses under 100K SF had a 3.7% vacancy rate in Q1, compared to distribution centers averaging 700K SF or larger's vacancy rate topping 9%, according to CBRE. 

Catamount Constructors Vice President Mitch Brown and CA South CEO Meg Epstein.

“There are better supply and demand fundamentals in shallow bay with good mark to market and rent growth opportunities, and one can typically still execute a value-add acquisition and exit below replacement cost,” Mealor told Bisnow in an email following the event. 

Shallow-bay industrial is also attractive to investors because the facilities are more flexible to tenants than other warehouse formats. They tend to be located closer to major population centers, attracting companies needing last-mile delivery hubs. They are also better for light manufacturing tenants and are usually more easily demisable to make way for multiple smaller tenants, a slice of the industrial market that is seeing the most leasing activity.

Their popularity is showing up in the data. Industrial sales volume in Metro Atlanta jumped 13% to $548M year-over-year in the first quarter as investors gained more confidence, according to a recent CBRE report. Among the significant shallow-bay deals, Unilev Capital purchased three light-industrial warehouses totaling 141K SF in Norcross for $18.2M from Berkeley Partners in January. In May, Oakhurst Realty purchased six shallow-bay warehouses in Lawrenceville from Warehouse One for $16.3M, CoStar reported

Nelson Worldwide's David McGoldrick, Greenleaf Capital's Dave Codrea, EQT Exeter's Chris Merriweather, Stonemont Financial Group's Dusten Estes and FCL Builders' Eddie Slay.

Haverty said his firm has acquired about a dozen of these warehouses in recent years, but finding new investments, especially at a price that makes sense in the current interest rate environment, is easier said than done.

The competition for smaller warehouses has increased as deep-pocketed investors like pension funds and private equity firms shift dollars away from office and into multifamily and industrial. 

“It’s a tricky market as a value-added investor. So much of the capital was sitting on the sidelines in ‘23, and I think a lot are looking for distress in industrial,” Haverty said. “I think a lot of groups who raised a lot of money felt the weight of that capital.”

Potential sellers are also not compelled to sell, given higher interest rates have brought the price buyers can pay down, said Arnie Capute, the associate vice president of investments with Realterm.

“In early ‘21 and ‘22, [landlords] were just getting bombarded with offers and every single one was bigger than the last one,” Capute said. “Frankly, any offer they receive today is not going to be the highest offer they’ve seen.”