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Atlanta's Industrial Market Showing Signs Of Overbuilding

Atlanta's seemingly inexhaustible industrial market may finally be running out of gas.

A forklift operator in a distribution warehouse

Only one of six recently delivered 1M SF-plus distribution centers has landed a tenant this year, according to Colliers International. And despite the slowdown in tenants looking for big-boxes, developers are ushering in another six mega-warehouses in Metro Atlanta.

“This brings up a growing concern where it is taking longer for these sized buildings to lease-up, adding significant vacancies as a result,” Colliers officials wrote in their third-quarter report. "Industrial leasing activity has been steady in the year. However, there have been no lease transactions over a million square feet in more than a year."

The cracks in Atlanta's industrial market will be a prime topic during Bisnow's Southeast Industrial & Logistics Summit on Nov. 12 at the Westin Buckhead Atlanta.

Earlier this week, the U.S. Commerce Department revealed that the domestic economy grew by 1.9% in Q3, down slightly from the previous quarter. Industrial tenants are sensitive to the gross domestic product — the more consumers spend, the more product is needing to be stored and shipped, and the more things need to be built. As GDP shrinks, so do tenants' need to expand their real estate footprint.

Pattillo President Larry Callahan

But at the moment, developers remain bullish on new development, Pattillo Industrial Real Estate President Larry Callahan said. More than 21M SF in new industrial space is under construction in Atlanta during the third quarter, according to an NAI Brannen Goddard report. That means new supply is encompassing 2.8% of the 757M SF of existing industrial space in Metro Atlanta.

“Our economy is only [growing] at 1.9%, so if you're growing at 3%, which [Atlanta] actually [is], you're growing significantly faster than the economy,” Callahan said. “If you look at industrial real estate growing all over the country, there are about five or six cities getting 3%.”

Callahan blamed slowing activity among big-box users squarely on the ongoing trade war between China and the U.S.

“The trade war is very real,” he said. "It is causing hesitation."

When it comes to decisions to lease or build space in the big-box environment, especially in the million-square-foot range, those will rest upon the green light of the C-suite. And if CEOs are concerned about economic growth, then big real estate projects will get shelved, Callahan said.

“I don't care who you are, even Amazon. A million square feet is a big commitment,” he said.

That perception was echoed in a recent report by the Atlanta-based industrial brokerage firm King Industrial obtained by Bisnow.

David Welch, partner with Robinson Weeks, master developers of the Fort Gillem redevelopment

“The consensus for this new hesitancy to spend is directly linked to the uncertainty surrounding the trade war between the United States and China. Couple this with the current economic slowdown in the European Union and fear of a world recession starts to play in peoples’ minds,” King officials said in their report. “With the looming uncertainty regarding what effect the tariffs will have on the cost of goods, decision-makers have taken a wait-and-see stance. They have delayed signing new deals for their expansions.”

While there may be a weakness at the top of the market, the bread-and-butter world of industrial real estate remained strong this past quarter. Absorption in the market, the real estate term that defines the number of square companies leased minus what they gave up, tallied more than 6M SF, giving the metro area the second-highest absorption rate in the U.S. behind Chicago, Colliers reported. That helped push average industrial rents to a record high of $4.85 per SF.

But the activity was among smaller warehouse spaces. Colliers said there was a strong number of new tenant move-ins in the 100K to 400K SF range, and there was “ample activity” from tenants needing less than 100K SF.

“My impression is we need to be more granular on the building increments that are most in-demand,” Robinson Weeks Partners President David Welch said. “I think the million-square-footers are a little over their skis at this point.”

Welch agreed that he has seen more demand among users needing 400K SF or fewer. Robinson Weeks is redeveloping a shuttered U.S. Army base named Fort Gillem into a massive industrial hub. The developer is set to deliver a 400K SF warehouse and a 1M SF distribution center next month, with plans to start two more buildings there in the coming year.

“So far, robust activity from ‘bread-and-butter’ tenants occupying less than 500K SF has managed to overshadow the increasing number of large warehouses coming online,” Colliers officials said in their report.

Yet, Welch said he has hope for the big-box market, and he expects activity in that realm to pick up steam into next year.

“I think we'll end up at 14-15M SF absorption by the end of the year. And I think that will be one of the top three markets in the country for the year,” he said. “Particularly the larger million-square-footers, it's a timing issue. I don't think those dried up. There's still a handful of those deals in the market right now.”

Hear more from Larry Callahan and David Welch at the Southeast Industrial & Logistics Summit, an all-day event beginning at 8:30 a.m., Nov. 12, at the Westin Atlanta Buckhead.