The warehouse factor
Atlanta's industrial real estate market remains key to the metro and Southeastern economy.
Bailey Webb
January 1, 2008
You probably don't give much thought to the giant, rectangular buildings lining exurban highways
and hiding behind pine trees in side streets off Jimmy Carter and Fulton Industrial boulevards or
Georgia Highway 155 in McDonough.
Even though warehouses aren't top of mind for most people, Atlanta's 450-million-square-foot
industrial real estate market is one of the key cogs of the metro and Southeastern economy, the
mid-point in the supply chain for everything from construction materials and appliances to
clothing, soft drinks and tooth brushes.
You can trace Atlanta's roots as a logistics center to the city's origin as a railroad town,
and its place as a transportation and logistics hub even is more profound today. According to the
U.S. Census Bureau, Atlanta is the nation's ninth biggest metro area and the fifth largest
warehouse/distribution market behind Southern California, Northern New Jersey, Chicago and Dallas.
"We have the transportation infrastructure that's ideal for distribution, and Atlanta is one
of the cheapest major cities to operate a business," says Jim Bacchetta, VP in the Atlanta office
of Raleigh-based Highwoods Properties. "We have the combination of projected job and
population growth, but we also benefit from the overall Southeastern job and population growth as
the region's distribution hub."
So the industrial market mirrors the overall economy, tracking who's buying what and the
health of various industries that rely on high throughput distribution and just-in-time delivery,
including auto parts and residential and commercial construction. Industrial real estate also
reflects a growing reliance on imports, as the flood of foreign goods consumed in the United States
leads to more bulk distribution centers for warehousing and assembly.
That flood of imports, as well as the Southeast's overall growth and fallout from 2002 labor
unrest at West Coast ports, means 4.5 million square feet of new industrial development underway
for the Savannah market, which currently has 23 million square feet. Since 1995, container volume
at the Savannah port has grown approximately 400 percent and annually exceeds 2.3 billion TEUs
(20-foot equivalent units).
Industrial real estate also reacts more quickly than other property sectors such as retail
and office. It's a more steady investment class, so peak returns may not be as substantial but
neither are troughs. Additionally, it takes less time to entitle and build industrial properties
than office towers and malls and shopping centers.
Development can slow and accelerate in response to demand, the macro economy and other
trends. "We always talk about the spigot, the ability to turn it off," says Matt O'Sullivan,
executive VP and chief development officer for Industrial Developments International (IDI). "We're
able to shut her down pretty quickly."
For its part, IDI, a locally based, privately held national developer, was slated to deliver
about 1.7 million square feet of speculative industrial product to the Atlanta market in 2007 and
landed a blockbuster tenant with Mizuno's 300,000-square-foot lease at Hamilton Mill Business
Center in the Interstate 985 corridor.
But toward the end of 2007, Atlanta's industrial development spigot trickled. At the end of
the third quarter, Atlanta's industrial and flex (a mix of office and light warehouse and
manufacturing buildings) market had 5.4 million square feet under construction, according to
industry tracker CoStar Group. That compares with 10.8 million square feet under construction at
the end of 2006 and 17.7 million under construction at the end of 2005.
The construction slowdown doesn't necessarily indicate a troubled market. Through the third
quarter, industrial property net absorption – the amount of space occupied versus the amount of
space vacated – totaled a solid, though not spectacular, 9.2 million square feet, while 8.4 million
square feet of new buildings were delivered in the first nine months of 2007.
The past six months of the year are generally the most active for industrial leasing, so that
pace puts the market on track for 12 to 13 million square feet of net absorption for the year.
That's slightly behind the past three years and vastly behind late '90s record absorption stats,
but it's certainly better than 2001 through 2003 when the market slammed to a halt, even posting
negative absorption in 2002.
The well-documented and lamented credit crisis that has crippled residential markets and
lending plays a partial role in the industrial real estate construction slowdown. Corporate leaders
still are trying to determine the impact of the credit crunch on their business, which delays
decisions on logistics operations. Lenders for both real estate and corporate debt also are trying
to figure out where the market will land.
"The underlying demand isn't being affected, but the ability to obtain financing is keeping
supply down," says Chris Brown, senior VP in the Atlanta office of Duke Realty Corp., one of
Atlanta's biggest office and industrial owners. "The market still is trying to absorb a huge amount
of development from 2005 and 2006. We've made significant progress in '07."
Duke is developing a 600,000-square-foot speculative distribution center in Braselton and a
200,000-square-foot speculative distribution center off Camp Creek Parkway near Hartsfield-Jackson
International Airport. The Indianapolis-based developer also landed one of the biggest deals of
2007 with its 657,000-square-foot lease with Dick's Sporting Goods at its Camp Creek development.
The credit crunch and lenders' reticence also has slowed investment sales. In the first six
months of 2007, CoStar tracked 188 sales of industrial buildings of more than 15,000 square feet
for a total of $723.7 million, or $46.54 per square foot. For the first six months of 2006,
Atlanta's industrial market posted 205 sales of industrial property totaling $977.4 million, $44.49
per square foot.
Despite that slowdown, insurance companies, pension funds, Real Estate Investment Trusts and
private equity funds still are hungry for Atlanta industrial properties, as well as prime
properties in the other major markets, because of long-term growth projections. As a real estate
asset class, industrial tends to be the most stable, and Atlanta's industrial market was noted as a
solid bet in the Urban Land Institute's recent Emerging Trends report on North American real estate
markets.
"Those core industrial markets are going to continue to be a target for institutional and
pension funds," says David O'Reilly, Atlanta investment officer for Chicago-based First Industrial
Realty Trust. "Industrial real estate is one of the most stabilized product types when compared
with office and retail, and that should continue going forward."