Atlanta’s industrial market posted solid but moderate growth during the second quarter, with 882,194 square feet of absorption,the ninth consecutive quarter of growth.
Total net absorption for the first half of the year was 3.3 million square feet. However, there was a jump in vacancy due to a large number of projects that were completed in the quarter.
Atlanta’s industrial vacancy climbed by 70 basis points, ending the quarter at 14.4%. Overall triple net asking rents increased 25 cents to $4.44 per square foot per year.
Warehouse/distribution space is at $3.85 per square foot per year, a 25-cent increase from last quarter, while R & D;/flex is at $7.02, a 5-cent increase.
There was activity in all industrial markets during the second quarter, though the pace slowed.
The Northeast/I-85 corridor vacancy remained flat at 14.4% while the Airport/South Atlanta submarket saw a 1.5 percentage point drop from first quarter to 15.6%.
Similarly, the Fulton Industrial/SW Atlanta submarket saw a hike in vacancy as well, ending the quarter at 16.2% vacant, two percentage points higher than first quarter. Development continued metro-wide with more than 11 million square feet of industrial space under construction.
Market Assessment
Atlanta’s industrial market turned around last year, with the positive trend continuing through the first half of 2006.
One caveat: there was a noticeable decrease in absorption in the second quarter. While activity was present in nearly all of Atlanta’s submarkets, several saw notable space gains.
First, the Northeast submarket posted the strongest with 472,016 square feet of positive absorption, mainly attributed to the 201,600 square foot move-in of Anderson Merchandising at 2200 Cedars Road in Lawrenceville.
In addition, there were several deals that have been signed and will occupy sometime during the second half of the year. These transactions include Progressive Lighting, which will move into 800,000 square feet at Park 85 in Braselton, and Systemax/Global Equipment Co., which will occupy 518,000 square feet at Hamilton Mill Business Center in Buford.
There is 3.2 million square feet of space under construction in this submarket alone. The Fulton Industrial/SW Atlanta submarket followed with 195,018 square feet of net gains during the second quarter on the heels of Uniform Direct and Lincoln Electric occupying 64,947 and 105,945 square feet of space, respectively.
There is slightly more than 1 million square of construction in the Fulton Industrial/SW Atlanta submarket. Meanwhile, there was 131,9090 square feet of positive absorption in the Airport/South Atlanta submarket, with American Tire Distributors occupying 84,000 square feet at 3075 South Park Blvd., in addition to the NDC expansion at 2500 Sullivan Road.
Investment Overview
Atlanta’s industrial investment market will outperform leasing expectations during the rest of the year as aggressive investors and an abundance of capital inundate the local sales scene.
Ideal investments are the new bulk buildings with 7-year leases that are able to produce low cap rates and high prices per square foot.
Older multi-tenant portfolios also are attractive, though they fetch lower prices due to their vacancies and dated style.
Investors spent more than $638 million in the quarter to buy industrial properties in Atlanta. One of the most notable deals was the portfolio sale of 14 buildings off Bankers Industrial, Bankers Circle, Winters Chapel Road and South Royal Drive.
MK Management/Kuniansky Holdings sold the 1.1 million-square-foot portfolio to Crow Holdings for $109.7 million.
Forecast
Developers combed Atlanta and its surrounding areas in 2005 in search of land for industrial development. This trend has continued as Atlanta is one of the major cities for industrial developers to have a presence, largely due to its central location and reputation as the southeastern hub for distribution.
Expect developers to play a significant role, albeit at a more subdued pace as new development hits the market.
Construction will be focused on some of Atlanta’s outlying distribution corridors, including I-85 North at Braselton in Barrow County and Jefferson in Jackson County, I-75 South in McDonough, I-85 South from Fairburn to Newnan, I-85 North at I-985 towards Gainesville and I-20 West in Douglas and Cobb Counties.
Further, import activity is strong in Savannah and is expected to increase capacity by 20% before 2010.
The trend of maximizing distribution efficiency by consolidating into larger and more modern facilities will continue as more companies find it convenient to house all operations under one roof.
Industrial investment sales will remain strong as there is an abundance of capital from investors eager to purchase properties in and around the Atlanta area.
Opportunities and Challenges
Although Atlanta’s industrial market is stabilizing, vacancy remains at 14.4%, making opportunities readily available for tenants looking for space.
While lease rates will fluctuate, increasing minimally, concessions will linger through 2006 due to excess space.
Landlords are not as aggressive as in previous quarters. For lease rates to substantially increase and concessions subside, vacancy will need to slide under the 10% mark.
In addition, the explosion of recent industrial development will hinder older space because many tenants are attracted to amenities in the newer buildings.
The greater Boston industrial market moved forward again during the second quarter with 282,272 square feet of positive absorption.
Vacancy declined by 20 basis points to 14.1% while availability remained consistent at 16.4%. There is more than 24.2 million square feet of vacant industrial space, the majority of which is located in the North submarket.
Average asking rents for all product types and classes is $7.65 per square foot per year, triple net. That’s in line with the previous quarter.
There were 23 industrial investment sales valued at more than $5 million each during the second quarter, for a total of $372 million.
The largest single transaction was at 154 Campanelli Drive in Middleborough, a 275,000-square-foot warehouse building that sold for $19.1 million, or about $69 per square foot.
Massachusetts manufacturing employment has begun to slowly improve, adding 1,800 jobs since the beginning of the year. Employment in this category is down 700 jobs during the past year and remains off by nearly 105,000 jobs, or 25%, from its high of 410,000 in 2000.
The dynamics of the manufacturing industry are changing from traditional New England employment strength areas such as textiles, paper and food products. They are losing ground to newer manufacturing-based businesses supporting computers, transportation and electronics.
Boston by Property Type
Warehouse/distribution properties lost 102,292 square feet of occupied space during the second quarter, split between the West and North submarkets.
South submarket warehouse/distribution space continued to improve, posting 30,970 square feet of absorption.
Warehouse/distribution facilities still maintain the lowest vacancy of all property types at 11.3%, equal to 8.7 million square feet, half of which is located in the South submarket.
Asking rents for this type of property are $6.02 per square foot, triple net, down 10 cents on the quarter.
General industrial space added 91,404 square feet of absorption during the second quarter, posting 190,295 square feet year-to-date.
Vacancy declined 20 basis points during the quarter to 13.2%, while asking rents posted an unexpected drop of 36 cents to $7.02 per square foot.
There is only 39 million square feet of general industrial space in the entire market, nearly half of which is located in the North submarket, making such available properties in other submarkets a limited commodity.
R & D;/flex landlords enjoyed a stellar second quarter with respect to space leasing.
There was 293,160 square feet of positive absorption in the period, which reduced vacancy by 60 basis points to 18.7%. The recent employment gains associated with medical labs and pharmaceutical companies has led to an increase in demand for related space, including R & D;/flex properties, especially in Cambridge.
Tenants such as Sanofi-Aventis, which recently signed on for 73,000 square feet of R & D;/flex space at 270 Albany Street in Cambridge, represent a popular employment group and recent trend for this type of property.
Asking rents rose slightly on the quarter by 13 cents to $9.84 per square foot per year. While R & D;/flex properties appear to be on the move, it is important to remember that that they still represent the highest vacancy of any property type and have some way to go before new demand begins to constrain supply.
Market Forecast
The outlook for the remainder of 2006 is for positive but light absorption.
Average asking rents should rise softly as a result of increasing tenant activity combined with light industrial construction activity.
R & D;/flex landlords may make gains in and around the Cambridge, Watertown and Waltham markets, as allied medical and pharmaceutical industries seek appropriate space close to higher education hubs.
Industrial investment activity is anticipated to continue along its expansion path as investors seek to put funds into a variety of sources.
Industrial investment sale volume could match that of the office sector in 2006. The popularity of industrial assets is on the rise as investors seek to maximize returns across all commercial property types.
Opportunities and Challenges
Five opportunities and challenges for the greater Boston industrial market during the coming 180 days:
The expansion of biomedical and pharmaceutical employment within the state has given rise to an increase in demand for R & D;/flex space, especially within markets near to higher education facilities and hospitals. Landlords with this type of space in their portfolio will stand to benefit from the increased demand. Landlords should also be cautioned, however, that their remains an overall abundance of this type of property within the market.
Construction activity remains light throughout the market, which is assisting landlords with the bottom line. Recent significant increases in construction costs are making developers much more cautious with respect to speculative projects.
The North submarket is gaining ground in a variety of towns and cities, especially in Andover, Woburn and Wilmington. Watch for increased asking rents within this submarket as supply tightens, especially for warehouse/distribution space.
While the West submarket has seen a few quarters of negative absorption, the market remains strategically important to the transportation and distribution industries, suggesting that these recent results are more of an anomaly than a trend.
High-bay warehouse/distribution properties remain the most popular type of industrial space on the market and will be the first to dip below 10% market vacancy in the market. Expect rents to rise for these properties in well located areas ahead of other asset classes.
With a vacancy rate at a low that has not been seen since 2001, Chicago proves that location is the deciding factor when companies choose a distribution center.
Centrally located between the coasts, Chicago joins six major freight lines and roughly one-third of all U.S. rail cargo transfers through the Metro Chicago area.
This proximity to highways, railroads and airports, coupled with the increased limitations placed on truck drivers’ hours, have peaked the interest of developers, investors and companies worldwide.
With almost 8 million square feet absorbed this year, the industrial market in Metro Chicago is considered one of the top three most active markets in the country along with New Jersey and Southern California. This substantial absorption also is reflected in a declining vacancy rate, down another 10 basis points to 8.4%.
Despite Chicago being a tier one city and the rise in construction costs, rental rates have been stable throughout most of the 18 submarkets.
Even factoring in the high cost of new construction, average asking rates of $4.21 per square foot remain constant for ware-house/distribution centers.
Rail-Influenced Activity
There are more than 4,500 acres of land designated for industrial buildings in the Chicago Metro area that are served by rail and more than 25 million square feet of proposed construction on these tracts of land.
Railroads in the Central Will and I-55 Corridor have become hot properties complementing the major warehouse and distribution centers developed in these areas.
This allows for goods and domestic products to be hauled from the California ports across the U.S. Rail facilities including the Elwood Hub at the old Joliet Arsenal have undergone major investments in renovating tracks, electric switches and locomotives due to new demand.
The 621-acre intermodal BNSF Railway yard, adjacent to the 3.4 million square foot Wal-Mart regional distribution center, is continuing to expand rapidly. The rail yard is expected to handle 800,000 containers in 2006, up from 275,000 in 2004, while anticipating an increase to 1 million in the following year.
Central Will and I-55 Corridor
The I-55 and Central Will corridors will soon host companies looking to consolidate their distribution centers. In anticipation of this increasing demand, many investors are paying top dollar to acquire land in both submarkets.
Together, these two submarkets accounted for 65% of the total construction activity during the second quarter. Wal-Mart’s 3.4 million-square-foot facility, which accounts for almost half of the construction activity, is slated for completion before year’s end.
Considerable transactions during the second quarter include Madison Warehouse closing on a 400,000-square-foot facility in IDI’s building in Joliet and Kimberly Clark’s commitment to Duke’s 800,000-square-foot facility.
Also, University Park is seeing similar activity with TCB leasing more than half of its 460,000-square-foot facility and the completion of USAA’s 700,000-square-foot industrial building, which is 100% available.
The I-55 Corridor, located 40 miles southwest of the city limits, continues to prepare for speculative tenants.
The region has more than 2 million square feet under construction, with one of the highest vacancy rates in the metro area.
Typically a vacancy rate this high would halt construction, though large speculative buildings are being developed in hopes that the next retailer in need of a major distribution center will not have the time required to plan a built-to-suit facility.
Asking rates remain low for this growing corridor, and it is expected to remain a tenant’s market until a majority of the speculative available space is absorbed.
However, the booming activity streaming over from the Central Will and I-55 corridors is increasing developer interest west into areas including Minooka.
Within five miles of Joliet, many large speculative construction projects are taking place, including a 1.3 million-square-foot facility by the Rockefeller Group and Opus’ 800,000-square-foot industrial building called Minooka Ridge Business Park.
Manufacturing
As an area once thriving with Tool and Die, PVC Piping and Metal Fabricators, Chicago’s small area manufacturers are making changes to stay viable in today’s economy.
While some companies may shift their business to more economic areas including China and Mexico, others are changing their product lines so they do not include lower cost materials that are made overseas. These companies have been successful by targeting specific industries that are willing to pay a premium, like food and drug companies. Consequently these are the fastest-growing industries in the state.
Illinois’ state and local governments support small manufacturers with programs including the Chicago Manufacturing Center.
This program helps manufacturers solve business problems through tangible solutions as it recognizes that manufacturing contributes one-third of all corporate taxes collected by state and local governments.
Opportunities and Challenges
Although Chicago has maintained its planned manufacturing districts, it will be hard to justify major industrial construction since residential condo conversion secures a higher price for land.
The majority of speculative warehouses will remain vacant until other major retailers, such as Wal-Mart, decide to move distribution centers into the area. As developers continue to convert farm land into industrial parks, true demand becomes a waiting game under the theory, If you build it, they will come.
Forecast
The Metro Chicago industrial vacancy rate is at a low not seen in six years and should remain stable during the rest of 2006.
Absorption should increase next quarter with many tenants filling the vacant spaces in buildings in the northwest suburbs. For developers and investors alike the Metro Chicago industrial market will continue to thrive in coming quarters.
Miami/Dade’s industrial market once again posted positive absorption gains in the second quarter.
The area, which saw 970,000 square feet of absorbed space in the period, recorded a 4% vacancy rate, down 40 basis points from the first quarter.
The second quarter’s results indicate geographically dispersed demand, with all submarkets ending the quarter with vacancy in the single digits.
Focusing on product type performance, the warehouse/distribution sector once again carried the load, contributing a disproportionate 70% share of the second-quarter gains.
The sector clocked 680,000 square feet of positive absorption in the quarter, boosting the sector’s year-to-date total to 952,075 square feet.
Vacancy in the warehouse/distribution sector was 4.7% at the end of the second quarter, down 50 basis points from the prior quarter. Responding to tightening conditions, area landlords have ratcheted up asking rents for general industrial, R & D;/flex and warehouse/distribution space by 10%, 8% and 11%, respectively, in the past six months.
Forecast
After a two-year malaise, the industrial market appears to have strengthened significantly as many experts believe that corporate expansion and relocation in the area will continue. Warehouse demand, which historically correlates highly with GDP growth, again increased in the second quarter.
Many Miami businesses are regaining their confidence necessary to increase inventories in preparation for future growth, especially those involved with trade to Latin America.
These are positive signs that the market is in a period of inventory absorption, which will kick-start additional speculative construction for developers.
At this point, it is still a market partially oriented towards landlords, with only 6.8 million square feet of available space in the 170 million-square-foot Miami/Dade county industrial market.
Opportunities and Challenges
The Miami/Dade industrial market entered the quarter with the lowest vacancy of any industrial market in the U.S. outside of California.
This fact, buttressed by eight quarters of consistently strong demand and an impressive second quarter performance with close to a million square feet of new demand, would indicate that developers, both regional and national, would be launching new projects sufficient in size to restore the marketplace to an equilibrium of sorts.
But despite the rapid improvement in leasing fundamentals from a developer’s perspective, the amount of space slated to come online in this cycle is relatively sparse given both the potential length and strength of the current market recovery.
The dearth of viable land parcels, increases in the cost of financial and human capital and the skyrocketing costs of various construction components have had an inflationary effect on the costs associated with development activity.
Consequently, as new industrial space comes online, it will most likely need to command a premium in order to satisfy developers’ yield requirements. This, coupled with an already extremely tight landlord’s market, should keep the trend of rent appreciation intact for the foreseeable future.
Expect to see tenants investigating the market to demonstrate a willingness to accept geographic concessions in exchange for opportunities where approved land can be acquired and developed. Others will occupy older space, with more economic lease terms.
The Minneapolis-St. Paul industrial market posted solid positive results for the sixth consecutive quarter.
About 358,000 square feet of positive net absorption in the second quarter brought the vacancy rate down slightly to 5.4% in the first quarter.
Excluding owner-occupied buildings, the vacancy rate fell to 8% percent in the multi-tenant market. Leasing rates remained stable, and are expected to remain flat or rise slightly through the rest of the year.
Leasing concessions,free rent, increased improvement allowances, among others,have been significantly reduced or eliminated in most submarkets.
The Southwest submarket has seen the most net absorption to date at slightly more than 500,000 square feet, but still has the highest vacancy rate at 7.3%.
The Minneapolis submarket has the lowest vacancy level at 2.6%.
The St. Paul Midway submarket was the only submarket to report negative absorption in the second quarter. This was due in large part to the former Gillette Building at 310 East 5th St. hitting the market.
The facility is for sale or lease. It sits on a 21-acre site and could possibly slated for redevelopment due to its proximity to downtown St. Paul.
The St. Paul Ford plant also is set to close. It’s likely to be redeveloped.
For the second quarter in a row the overall market again experienced a slight increase in vacancy as positive absorption was offset by large facility closings.
Vacancy increased from 8.6% to 9.2% with available inventory increasing from 9.5 million square feet to 10.2 million square feet.
The closures of the American Video Glass plant and the Sony Warehouse in New Stanton added more than 800,000 square feet to the market and were responsible for the increase in availability.
On a positive note, several significant warehouse lease and sale transactions were completed.
RPL leased 60,000 square feet in Harmar Township, Curbell Plastics leased 21,000 square feet in Cranberry Township, Eldorado Properties bought a 101,000-square-foot building in East Butler and Fox’s Pizza acquired a 40,000-square-foot property in Murrysville.
Industrial sales included the Keystone Commerce Center, a 180,000-square-foot multi-tenant building in the Thorn Hill Industrial Park. It sold for $11 million or $61 per square foot,the highest price per square foot for a multi-tenant industrial building.
Despite a very rainy June, construction on several light industrial buildings remains on schedule.
In the West submarket at the Imperial Business Park, the first 100,000-square-foot building was made available for occupancy. By the end of the year, a 40,000-square-foot building will be completed in McClaren Woods Business Park, with construction on a 44,000-square-foot building starting shortly.
Site work neared completion at Clinton Commerce Park, allowing construction to begin for the first speculative building, which is slated to be 200,000 square feet.
A 130,000-square-foot building in the Northwest submarket will be available in the fall at Leetsdale Industrial Park.
Later in the year, Cranberry Business Park will see work on 105,000 square feet of industrial space wrap up, with 84,000 square feet of the complex available.
Analysis by Grubb & Ellis Co.
