Distress Could Be On The Horizon For Atlanta's Recently Robust Industrial Market
Some owners of industrial properties around Atlanta could be in for financial distress as leasing slows, the construction pipeline is enormous and owners are having a harder time refinancing their debt, panelists said during Bisnow’s Southeast Industrial event last week.
Industrial sales in Metro Atlanta fell off a cliff in the first quarter, according to Colliers data, with just $500M trading compared to more than $1B in the first quarter of 2022 and more than $2.2B in sales in the fourth quarter. January to March was the lowest three-month period of sales activity since the third quarter of 2015, according to Colliers.
As the industry faces a gulf between buyer and seller expectations, warehouse and distribution center landlords with loans coming due are going to have a difficult time refinancing, which could lead to distressed sales, said Willie Ross, the senior vice president for the investment management firm Faropoint.
The industry is facing a “double whammy” with both pension funds and core funds already overallocated in commercial real estate, he said. Developers who locked in construction financing two years ago are in a particularly tricky spot.
“There’s a trillion dollars of loan maturities coming in the next two, three years. A lot of that stems from all the variable rate financing that the industrial developers did in 2021,” Ross said. “The reality of that is that there’s not a true take-out for a lot of those loan maturities and there’s not true rescue capital. There will be some distress with the cost basis that was secured in 2021 and 2022, all that is coming due in the next two to three years.”
There was a total $4.6B across 459 industrial property loans in October maturing over the next 24 months with a debt service coverage ratio of 1.25 times or less, according to Trepp. If that ratio dips below 1, that means the property’s cash flow no longer covering its debt obligations.
Over the past few years, leasing activity gave confidence to developers that their properties' performance will improve over time and be resistant to broader market swings, especially as consumers shifted their shopping habits online. Now the bottom’s dropped out of leasing as well, panelists said, while developers are still building 35.8M SF of new warehouses and distribution centers, according to Avison Young.
Leasing activity slowed by nearly 50% in the first quarter compared to the same period in 2022, and net absorption, while positive with 1.7M SF, dropped year-over-year from more than 4M SF, according to Colliers.
The combination of slowing activity and the pipeline of supply underway means lenders are shying away from financing new projects, Stonemont Financial principal and Senior Vice President Neal Moskowitz said at the event.
“It’s tough to finance a million-square-foot building at the next exit out,” Moskowitz said. "You can’t do it. So we’re doing about a third as many projects and trying to find infill sites where you can put one or two single-load buildings or smaller cross docks."
Moskowitz said there are plenty of lenders expressing interest in financing new industrial projects, but terms have become stricter, requiring developers to pony up more equity than they had in the past two years. And much of that interest has yet to turn into actual construction loans, he said.
“It feels like it's on the bigger deals right now everyone's waiting for the next bank to fail or the next Fed meeting. They're like, ‘We're in, we want to do the deal. But let's wait 30 days,’” Moskowitz said. “If you hear something different in the economy over that lifespan of that term sheet, good luck.”
Scannell Properties Senior Development Manager Jacob Holdeman said a major problem with financing stems from regional banks and the upheaval they are experiencing, with three major collapses in the past month and a half.
“We can only do one deal, versus the four deals we could have done 18 months ago. So it'll be interesting to see where it all shakes out,” he said. "Regional banks are really our bread and butter for construction debt, and they're in some distress right now."