New Spec Construction Hurts Industrial Market

ATLANTA-Vacancies in the shallow-bay and distribution-space categories, along with lateral tenant relocations, increased the metro area’s net absorption number in the first quarter to a negative 1.6 million sf. The vacancy level is 15.2%, but bulk-warehouse space showed a positive net absorption of 873,557 sf and ended the first 90 days with a vacancy of 14.9%, according to a new survey by locally based Colliers Cauble & Co.Even though there was a total 9.7 million feet of leasing deals completed in all three industrial categories, a total 2.5 million sf of new product was also in the pipeline with 13% pre-leased. “New construction, especially in spec buildings, continues to hurt the market by exerting downward pressure on rental rates and adding more vacant space to the market at the time of delivery,” says Colliers Cauble research coordinator Scott L. Amoson, who prepared the market analysis.First-quarter deliveries totaled 1.7 million sf with 90% of the space absorbed on delivery. Under construction is 1.3 million sf of warehouse space; one million sf of shallow bay and distribution space; and 214,500 sf of flex space. “The timing of deals is taking much longer than usual,” Amoson says. “Net absorption will begin showing positive gains as the deal activity currently on the market closes.”Most of the construction is occurring in the Northeast Atlanta and South Atlanta submarkets. In the bulk warehouse sector, the Interstate 20-West Fulton Industrial Boulevard submarket completed the most leasing deals. Amoson attributes the loss in occupied space in the shallow-bay and distribution sectors to two factors. “First,” he says, “in spite of the general economic recovery, a number of both national and local companies are still suffering the effects of the recession and have had to vacate their tenancies because of financial difficulties and/or decisions to consolidate and contract their spaces.”The second factor is technology “in the form of computer-based inventory and shipping systems,” Amoson notes. The new technology is “allowing distributors to transport their goods efficiently without increasing inventories, giving them greater control of their space usage.” But as consumer demand for these goods increases, warehouse inventories “will have to rise and distribution companies will then require additional space to store the finished materials.”New construction is also pushing down rents. For example, first-quarter asking base rates for flex industrial was $5.50 to $7 per sf; shallow bay and distribution, $2.75 to $4.25 per sf; and warehouse, $2.50 to $2.75 per sf.