Activity in 2012 looks good, but not when compared to inventory

Activity in the Atlanta industrial real estate market has remained fairly high and stable since 2009.  The fourth quarter of 2012 showed activity at 10.2 million square feet, ending the year with a total of 45.8 million square feet of activity.  This high level of activity in the last quarter is pretty surprising because, as Sim Doughtie states in our most recent Point of View, “typically industrial activity decreases 20 to 30 percent during a quarter when national elections are held.”  The reason the Atlanta industrial market did not seem to follow the trend this time is probably because many industrial building owners decided to sell property before the end of the year to avoid an increased capital gains rate in 2013.

Although the high level of industrial activity over the last few years sounds great and seems like it means good things, when compared with inventory levels for the same time period, we have to realize that the market probably isn’t improving for us as much as we hoped. 

The top graph in the slide shown below shows the square footage of deals signed each year.  These figures have stayed fairly high even throughout economic downturns.  The bottom graph shows these same figures for square footage, but compared to the entire Atlanta industrial real estate market.  Activity, when compared to inventory, has been very low for the last several years.

Competition in today’s market is much higher than in previous times.  King Industrial currently tracks over 660 million square feet of industrial and service space in Metro Atlanta.  As the total square footage of transactions remains fairly stable, the total industrial inventory base continues to grow.   This means that activity, as a percent of total market inventory, continues to decrease.  Charlie King sums it up well as he says, “we are in a much more competitive market with more empty space, but chasing the same number of deals.”

New construction up from last two years, but does this mean anything?

Over the past ten years, new construction in the Atlanta industrial real estate market reached a high of around 14 million square feet in 2005 and a low of about 2.5 million square feet in 2011.  New construction in 2010 came to just under 2 million square feet of space.  The fourth quarter of 2012 showed new industrial construction in Atlanta to be at about 3.7 million square feet.  This is an improvement of about a million square feet over total new construction for 2011 and 2010, but does it really mean good news for the Atlanta industrial market?  I don’t think anyone can be sure. 

It is worth noting that about two-thirds of the new construction reported at the 4^th quarter of 2012 was build-to-suit and about one-third was spec construction.  Of the one-third spec construction, most of that was the IDI development. 

Although in 2012, there was a slight increase in the amount of spec construction due to IDI, we still seem to be following the same general trend of mostly build-to-suit construction for the past few years.  Since 2009, the vast majority of new construction has been build-to-suit mainly for two reasons.  First, our excessive inventory of available space keeps prices down by enough that new construction has a very hard time competing with the prices of used space.  Second, there are many older, big-box buildings that have low ceilings and not enough trailer parking.  The majority of the build-to-suit construction winds up being the consolidation of several different buildings or relocation from an old facility to a new facility that can better accommodate the needs of current users.

Build-to-suit construction can make activity appear to be improving, but we have seen that this does not usually translate to a notable impact in net absorption.  According to Charlie King, “this is because most of the companies involved in the build-to-suits are already located in Atlanta and usually give up just as much or even more space than they occupy in a new construction.  This leads to very little net absorption and more functionally obsolete buildings on the market.”

From a developer’s perspective, things are definitely not great.  The Atlanta market still has a great deal of space that needs to be absorbed and owners of older buildings are faced with a problem because these spaces are proving difficult to lease.  We are still a long way from seeing the same level of new construction that took place in 2005, but maybe it is best if we don’t reach such a high level again and avoid such a huge crash in the market over the next cycle.

4th Quarter of 2012 Shows Highest Net Absorption Since 2007

I think it’s safe to say that most people are trying not to get their hopes too high about the full recovery of the real estate market, or even the overall economy.  However, it’s hard not to be pleased after hearing that in the 4^th quarter of 2012 the Metro Atlanta industrial real estate market showed the highest amount of net absorption so far since 2007. 

The most severe negative net absorption the Atlanta industrial market has gone through took place between the 4^th quarter of 2008 and the 4^th quarter of 2010.  Since then, net absorption has been steadily improving.  At the end of last year, the Atlanta industrial market showed three consecutive quarters of positive net absorption.  The 4^th quarter of 2012 showed net absorption of 5,155,035 square feet, which is almost double that of the 3^rd quarter.

In 2009, total net absorption in the Atlanta industrial market was -17 million square feet.  This is the worst figure for net absorption that this area has ever seen.  Total net absorption for all four quarters of 2012 came out to 5.2 million square feet.  This is the first year that has shown a positive figure since 2007, when net absorption totaled 8.3 million square feet. 

Total activity in the 4^th quarter of 2012 was 45,828,684 square feet, which compares fairly well to the record high of 50,437,996 square feet of activity in the 4^th quarter of 2007.  The last few quarters have definitely shown improvement for the Atlanta industrial real estate market.  Hopefully the next few months will bring more positive figures and good news to report!