COVER STORY, APRIL 2012

INDUSTRIAL INSIGHT
Developers and owners say a rebound is afoot in the Southeast.
Savannah Duncan

After years of barely having a pulse, the industrial market is showing signs of life. Development activity is on the rise in markets that were hardest hit by the recession, such as Atlanta; Charlotte, North Carolina; and parts of Florida.

“In the Southeast, development has been slow to come back,” says Sam O’Briant, executive vice president for the East and Southeast regions of Duke Realty. “Local economies, especially in central Florida, the Carolinas and Atlanta, were hit hard because so many companies were involved in the housing industry,” adds O’Briant, who is based in Duke’s Atlanta office.

Industrial vacancy rates peaked in 2010 and started to decline in 2011, according to New York-based Reis.

In Atlanta, the vacancy rate at the end of 2011 was 17.5 percent, down from 17.9 percent a year earlier. The vacancy rate in Charlotte also fell 0.4 percent from 15 percent in 2010 to 14.6 percent at the end of 2011.

Miami is experiencing even more rapid improvement. Miami’s industrial market posted a vacancy rate of 7.7 percent in the fourth quarter of 2011, down from 9.0 percent a year earlier.

Absorption rates are following a similar pattern, according to Reis. In 2009, absorption was at its worst, but has gradually improved. In Atlanta, there was negative absorption of 4.14 million square feet in 2009. That’s in stark contrast to the 2.56 million square feet of positive absorption in 2011.

Charlotte recorded negative absorption of 1.37 million square feet in 2009. By 2011, Charlotte had turned the corner with 445,000 square feet of positive absorption. Miami also has been on a roller coaster with negative absorption of 2.72 million square feet in 2009 and positive absorption of 2.08 million square feet in 2011.

Development Activity

With a falling vacancy rate and growing tenant demand for space, the Southeast is poised to begin developing again.

“The Southeast is a good place to do business with a low cost of labor, a skilled workforce, available land and modest construction costs,” says John Barker Jr., senior vice president of development for Red Rock Developments, based in the company’s Charlotte office.

In December 2011, Red Rock was tapped to build a $58 million, 226,000-square-foot facility for CTL Packaging USA’s North American operations. Construction is slated to begin within the next 2 to 3 months.

“There has been good absorption in Charlotte and there’s a need for some new space,” says Barker.

South Carolina has also experienced some development activity with BMW’s recent announcement that it will invest $900 million in its Charleston plant. Additionally, in December 2011, Pattillo Construction completed a 300,000-square-foot manufacturing facility for Boeing in Charleston. Larry Callahan, CEO of Pattillo Construction, based in the firm’s Atlanta office, says the Boeing facility will be a huge economic driver.

“The activity that takes place in the building is only the tip of the iceberg in terms of what will be generated,” says Callahan. “For example, when BMW [opened its facility], 46 plants came in to support it. Boeing is generating that kind of activity.”

Panattoni Development Co. has also been active on the build-to-suit front. Georgia-Pacific Consumer Products announced in late January that it had selected the company to develop a 900,604-square-foot distribution center in metro Atlanta in McDonough, Georgia. The building is slated for completion this fall.

IDI is building a 650,000-square-foot speculative cross-dock distribution building at Riverside Business Park in the Interstate 20 West submarket of Atlanta.

Another project under construction in Atlanta is IDI’s 650,000-square-foot speculative cross-dock distribution building at Riverside Business Park in the Interstate 20 West submarket.

“This submarket has experienced relatively strong demand from tenants in the 500,000- to 750,000-square-foot range,” says Jay Mitchell, senior vice president and regional development officer, based in IDI’s Atlanta office. “Coupling the current tenant activity and relatively limited supply of modern buildings, we feel speculative development is warranted in this submarket.”

In addition, the company is working on the 559,407-square-foot Mitsubishi Electric Cooling and Heating headquarters, a build-to-suit project located in the Huntcrest Business Center in Suwanee, Georgia.

Pattillo Construction is building a speculative 77,126-square-foot building at the Gainesville Business Park in Gainesville, Georgia.

Pattillo Construction has a speculative building underway in Georgia at the Gainesville Business Park in Gainesville. The building will be 77,126 square feet with the potential to expand to 140,000 square feet. Completion of the shell building is slated for this summer.

In March, Caterpillar broke ground on its $200 million, 265-acre plant in Athens, Georgia, approximately 70 miles from Atlanta.

“A lot of deals in Atlanta have been a million square feet or so,” O’Briant says. “Those don’t happen all the time, but they are very competitive and heavily pursued.”

Miami has also experienced an influx of development activity. “Miami-Dade has a lot of great dynamics with the Port of Miami, overall growth and trade with Latin America,” says Andy Petry, vice president and city manager for Liberty Property Trust’s Southeast region.

One of the largest, if not the largest, projects under construction in Miami is Liberty Property Trust’s $135 million, 126-acre Miami International Tradeport. Butters Construction & Development is overseeing construction of the project, which can hold between 1.6 million and 1.8 million square feet. The first building is slated for completion in the second quarter of 2013.

Barker says that Memphis, Tennessee, is also a market that is of interest to developers. “There are some large deals happening in Memphis, with six build-to-suit projects north of 300,000 square feet,” he says. “There is also a new interstate that will connect to the city from a little farther out. It will change the dynamics of the Memphis market with some new land, parks and players.”

Interstate 22 will pass between Memphis and Birmingham, Alabama, via U.S. 78.

Trend Lines

In the Midwest, clear height ceilings have started moving from 32 feet to 36 feet, a trend that has started to make its way to the Southeast, says O’Briant. Additionally, building sizes are growing as well, with several projects surpassing 700 million square feet.

The common denominator is still people looking for the best economics possible. “We are a Walmart society — we buy cheap,” Barker says.

Mitchell says lenders favor borrowers with a track record of success, blemish-free payment history and strong equity contribution. “Bankers are posturing in the right direction,” Callahan says.

Looking ahead, Callahan says the U.S. industrial market has several factors working in its favor, including a growing population and a relatively modest wage rates, the opportunity to achieve energy independence and a desire by the current White House administration to double exports during the next 5 years.

“We are becoming more competitive for products,” he says. “Unless something dramatically shifts, we will continue that trend and it will be good for both jobs and the industrial market.”

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