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.