Unlike the other major distribution hubs around the country, Atlanta has seen very little speculative development since the “Great Recession.” In fact, you
can literally count on one hand the significant spec buildings
delivered in Atlanta since the dark days of the recessionary
period, a remarkable lack of development for a 655-million
square-foot industrial market.
Atlanta, like most markets, struggled with negative absorption
from 2008–2010. During that three year stretch Atlanta
experienced consecutive annual negative net absorption
totaling 12. 5 million square feet. It is certainly no surprise that
the spec pipeline was cut off at that time.
However, the following three years tell a very different story.
From 2011–2013, Atlanta enjoyed over 24 million square feet
of positive net absorption, and 2014 had the highest absorption
in any single year since 2000. This confluence of factors has
also naturally led to the lowest vacancy rates in fourteen years.
That’s great...unless you are a tenant. Keep in mind that as of
the 2014 year-end you could still count the significant spec
deliveries in Atlanta since the recession on one hand.
All of that is about to change. Today there are 24 spec buildings
(and counting) in the pipeline totaling over 12. 5 million square
feet on the way to provide relief to tenants who are finding very
few quality options in many segments. It is notable that almost
half of these new developments are over 500,000 square feet.
Atlanta has historically maintained some of the lowest rental
rates nationally for quality distribution space. Rates in the mid
$2’s net for first generation bulk space had not been uncommon
– even preceding 2008. Fortunately for developers, there have
been several recent transactions that indicate rates have been
pushed to somewhat higher levels. The question is, will rates
continue to hold after the addition of over 12. 5 million square
feet of new inventory?
Time will tell; however, with more disciplined capital, higher
construction costs and more constrained transportation
capacity than previous development cycles, the deck is stacked
today for rates to hold. One key to rate stability and growth this
time around could be a more thorough understanding of how
efficient a solution each available building is for a prospective
tenant’s operation relative to the other options.
We have all seen the metrics that show what a small percentage
the cost of a typical lease can be for a distribution center
when compared to labor and transportation costs for that
same operation. As e-commerce fulfillment gains more of the
overall market share of warehouse inventory, the position that
rent enjoys as being the “low man” on the cost totem pole
could become magnified. Granted, lower fuel prices do offset
somewhat but do not adequately compensate for the lingering
capacity issues the transportation sector is experiencing.
As this happens, it should follow that the optimal location
for a major distribution center with a material e-commerce
component will become more geographically specific than one
that is only replenishing bricks and mortar destinations in a
region. In other words, for certain operations and locations,
buildings that historically would have been the third and fourth
choice on the short list might find they are uncompetitive, even
at substantially discounted rates.
Gone are the days when preparation for showing a bulk
building ended with printing flyers and memorizing your own
building specifications. Today when developers say “location,”
tenants hear “transportation.” Knowing how a specific
building stacks up to its competition relative to each tenant’s
operational needs (parcel hub proximity, intermodal proximity,
same day delivery service, on site truck flow, last mile model,
labor, parking, trailer storage, incentives, etc.) can go a long
way to inform owners as to how competitive their option is
before they ever receive an RFP.
While the spec wave is coming to Atlanta – and is needed –
not everybody is jumping on the bandwagon. There is another
school of thought in Atlanta’s development community that
believes that due to the fluidity of today’s requirements,
chances at securing the next major deal are better with a
A MUCH NEEDED WAVE OF NEW CONSTRUCTION IS ROLLING
INTO THE DISTRIBUTION CAPITAL OF THE SOUTHEAST IN 2015.
By Bradley C. Pope, SIOR, CCIM