COVER STORY, OCTOBER 2011

ATLANTA INDUSTRIAL ROUNDTABLE
Industry experts discuss the state of the market.
Moderated by Sim Doughtie

As the commercial real estate market prepares to enter the 4th quarter, Southeast Real Estate Business magazine conducted an industrial roundtable to discuss the current state of the market, what kinds of deals are being made and what the future holds for the industrial world. As a whole, there was a sense of optimism that the market has hit bottom and shown slight improvement. Deals are starting to get done, but at a slow pace. Food and consumer product manufacturers make up the majority of buyers and tenants in the transactions that are occurring at the moment, but the companies who have been sitting on cash on the sidelines are beginning to look for deals as well. The future of the industrial market remains to be seen, but there may be some opportunity with foreign companies. The panelists included: The moderator, Sim Doughtie, president of Atlanta-based King Industrial Realty; Phil Skinner, partner of Arnall Golden Gregory’s Atlanta office; Kent Mason, regional director of First Industrial Realty Trust’s Atlanta office; James Philpott, salesperson of Cushman & Wakefield’s Atlanta office; Chet Koenig, principal of Avison Young’s Atlanta office; Bob Robers, vice president of Jones Lang LaSalle’s Atlanta office; Rodney Davidson, vice president of Jones Lang LaSalle’s Atlanta office; Rope Roberts, region economic development manager of Atlanta-based Georgia Power; Daniel Felton, research analyst of Jones Lang LaSalle’s Atlanta office; Ronnie Wenzler, senior managing director of Cassidy Turley’s Brentwood, Tennessee, office; John Rooker, vice president of Tucker, Georgia-based Rooker Properties; Greg Haynes, senior vice president of CB Richard Ellis’ Atlanta office; Pat Murphy, senior vice president of CB Richard Ellis’ Atlanta office; Chris Brown, senior vice president of Duke Realty’s Atlanta office; and Larry Callahan, CEO of Pattillo Industrial Real Estate’s Stone Mountain, Georgia, office.

Sim Doughtie.

Doughtie: Right now we’re tracking over 631 million square feet in the Atlanta market and 604 million of that is distribution space. Of that 604 million square feet, 20.6 percent, or 124 million square feet, is available. That’s a huge number.

From an absorption standpoint, we just now had, in the second quarter, the first positive absorption we’ve had in 11 quarters. In 2007, we had over 50 million square feet that was leased and sold, the best year we ever had in Atlanta. Right now we’re about 43 million the last four quarters. For the first half of this year, we’ve done over 24 million square feet of deals, which tells us is it could be the third or fourth best year for activity if it continues.

All new construction has been build-to-suit. We still have a credit crisis. Lending is improving but it’s not there yet, so why would you build a spec building in today’s market. The other banking part of it is you have some banks foreclosing on people they shouldn’t foreclose on because they want to get the real estate off their books so their stock prices will go up. You have other banks that can’t foreclose because if they do the FDIC will shut them down because they don’t have the reserves. So we still have an issue.

Phil Skinner.

Doughtie: We all have different perspectives. Some guys are brokers, some guys are developers, so from a standpoint of where we are in the real estate cycle right now, I’d like to get a flavor for where everyone thinks we are.

Skinner: Over the last few years we’ve been settling and slowly recovering from the lowest point in our cycle. We measure hours as one way to see how busy we are, and I would say we were down at the lowest point an average of 350 to 400 hours per real estate attorney. Multiply that times 30 attorneys. We got back 200 hours per attorney last year, and we’ll be up another 150 hours per attorney this year. I can’t say we’ve had a lot of industrial activity. It’s been leasing but not a steady flow, though we’re optimistic and just want to keep moving in the right direction. We’re concerned about the international credit issues and the political uncertainty here at home. Those are two big storm clouds on all of our horizons.

Doughtie: Kent [Mason], what do you think?

From left: Kent Mason, James Philpott and Chet Koenig.

Mason: We are tremendously better in Atlanta then we were 12 to 18 months ago, but we’re a long distance from where we used to be, and that’s reflected in the vacancy rates, the rental rates, the concessions that landlords are having to make and it’s reflected in the paychecks of the brokers that do this on an at-risk basis because the leases are shorter terms, and the rental rates are lower. It’s a grind. We are all worn out. We’re optimistic due to the levels of activity, particularly on the low-end side of the square footage increments. We were dead when it came to the 5,000 to 10,000-square-foot deals for a couple of years, but we’re starting to see deals make and that’s very encouraging.

Doughtie: From our standpoint, deals are up 40 percent. We do a lot of little mom and pop’s so it is coming back.

Philpott: Leading indicators like job growth and consumer confidence are going up so it must be getting better. The name of the game is to diversify and figure out ways to continue to make money in a market like this. If the small deals are coming back, that means the bigger deals will follow.

Koenig: It’s better, there’s no question about that. Our occupancy rates are much higher. I’ve done better this year than two years ago. Having said that, we are 3 to 4 years away from being back to where we were prior to this downturn. I just don’t see that kind of momentum but I think we maybe have plateaued a little bit. I don’t know if this is the new normal but we’re where we’re going to be for the next couple of years. At the end of the day it boils down to jobs and I don’t see the job picturing improving. Rates certainly haven’t improved at all, they are where they were 2 years ago.

Robers: My hope is that we’ve seen the worst. Our group has been very busy, but that’s not necessarily an indicator of the overall economy. We’re just trying to look under every rock and find every opportunity that’s out there. Our consulting business is at an all time high so people are preparing for when we emerge and find ourselves on the other side.

Davidson: It’s been a while since we’ve seen the days of lend and extend so those people who were worried about their survival aren’t as much of a concern anymore. Rent terms are still ugly, concessions are still high. We’re seeing some of the big boxes put space back on the market, but the 40,000 to 60,000-square-foot deal doesn’t really feel like it’s out there right now. Until we start hitting those users, occupancy will move that much.

Rope Roberts.

Roberts: We’ve hit the bottom but we’re staying pretty steady, below 25 percent. We’ve lost a lot of power the last 3 years and that’s from flex closing, flex consolidating and cutting back shifts. That’s statewide. We’ve got a lot of capacity for those new projects you bring in when it comes back. That’s the ebb and flow of our business and that’s what we have to deal with, but we have had a number of closings all over the state.

Mason: Year over year from 2010 to 2011, how is the metric on power use?

Roberts: It’s coming back up. In 2007 and 2008, really that’s when we started to see a lot of closures and plants moving for various reasons before we really had our downturn in 2009. But production is coming back, and technology is allowing them to have less workers on the floor.

Felton: It still looks pretty precarious. Atlanta’s housing market has not come back at all. We really haven’t started to recover so it will be 2 to 4 more years before things are back on solid footing.

Wenzler: Nashville is in an interesting place. Overall our business environment is tremendously positive, and if I look at the whole industrial market, where it’s weak is in the big box sector. We’ve had some absorption recently. There seems to be this offsetting theme of pre-building, going vacant and build to suit. That’s not necessarily positive. There’s been consistent activity from 20,000 to 150,000 feet. We’ve had some positive absorption.

Really it’s like two minds. If you’re asking as a broker, it feels very grim to me as a broker. We’re out here really working doing short-term deals, and the people we are working for are less satisfied. But we’ve got some positive things in Nashville. Healthcare is big, automotive is growing. We’re the state capital and we’re a no income tax state. All those things really matter and we’ve attracted a lot of corporate headquarters during the past few years. We had a tremendous flood a year ago that impaired a lot of industrial buildings. So it’s interesting that a negative became a positive. That actually caused us a blip of absorption. Overall it’s healthy and a great place to be in business.

From left: Daniel Felton, Ronnie Wenzler and John Rooker.

Rooker: We’re seeing the same thing everybody is seeing. From 12 to 18 months ago, activity is certainly up for us as is leasing. Everything just seems to take a long time. It’s almost like people looking for reasons not to deal instead of reasons to deal. It’s not going to be easy, and we’re not happy about the deals as far as where the rates are falling, but tenants are moving into spaces so you’ve got to be happy about that.

Doughtie: In our business you’ve got to be an optimist.

Haynes: I asked a few people I work with about what they thought. Here are the adjectives they used: slight, improving slowly and gradual. It’s improving at such a slow rate that in order to have a break out and really get back up to where we were in 2006, we really have to make some fundamental changes. We’re a bit hamstrung by the fact that there are some external back ups we can’t control. We’re not particularly job creators, we react to job creators; that’s our function. Until we start having some real positive job creation, we’re going to be talking about it being slow.

Doughtie: Well you know we lost 200,000 jobs in one period. 

Murphy: Brokers by their very nature are optimistic. Three years of trying to be optimistic has been wearing on a lot of us. The summer was just absolutely dead. There were things to work on but no deals being signed. But Labor Day hit and the phone started ringing for us. There’s just a sense now that people want to prepare for some sort of comeback. As John said, people were all delaying their decisions. I looked at our numbers and this year it’s eerily similar to 2009 in terms of the number of transactions we’ll do this year, dollar volume and square footage. It’s just been flat for 3 years now.  I think this fourth quarter is when we historically do most of our business. If you look back to 2009 and 2010, the fourth quarter wasn’t great, it was okay. This fourth quarter feels like a return to old patterns where the 1st and fourth quarters are our best with the second and third being the worst. If the fourth quarter turns out to be really good this year, then I’m optimistic that we’re going to see a return to normal patterns — not normal levels but normal patterns in 2012.

Doughtie: Everybody’s busy and that’s encouraging.

Brown: Comparing ourselves to 2009 and 2010, that’s a terrible place to be because you’re comparing yourself to a canyon. It’s disappointing so far this year, I thought we were going to have a much better year. The good news from the people who own buildings is that the cap rate environment has returned. If you think industrial is bad, try having an office portfolio. The other thing I would add is if you have a Class A building, they feel a lot better. If you have primarily B or C buildings, it’s not any better. It’s brutal. There are no small buildings. It’s people moving from B to A’s. That’s all that’s happening, and it’s not a good environment.

Callahan: We are starting to get used to the pain. You’ve got to be realistic about where we are. The good news is we are seeing activity. This year we’re probably going to have our number two volume year in our history for construction. We’re not doing a dime of government work. It’s all contract work with companies. So do we know if that will continue? Nobody knows. It’s the nature of this business. You can have a great year followed by a year where it falls off the cliff.

We’re seeing some foreign companies active here. Two places to keep an eye on are Germany and Japan. Japan just had the worst nuclear disaster that the world has ever seen. Their people are very much against nuclear right now and 70 percent of their power comes from nuclear. So what if they get their wish and start shutting down nuclear plants? They don’t have coal. Same thing with Germany. They are trying to shut their nuclear plants down. They have coal, but do they have enough coal that they’re going to be able to compete like they have been competing? What’s going to be built is primarily manufacturing. I’m going to shock the world here and say we’ve graded a site for a spec building in Gainesville, Georgia. It’s targeted for manufacturing.

Doughtie: To your point about manufacturing coming back to the United States, a lot of people who were doing business in Asia are moving back here. We’ll see some build to suits on the bigger stuff. Of the 124 million that’s available right now, only about 8 million of it is new space. So if a Fortune 500 company comes to Atlanta and they can’t find what they want, they will build it. We’ll still see building because of that.

Let’s talk about activity. I’d like to know is it manufacturing or distribution, is it local companies or Fortune 500 companies? Who are you building for?

Callahan: There are certain states where a lot of companies are thinking this is not the best physical situation and we might be better off in another location. Those companies are looking at places like Georgia. The companies are consumer products and food.

The biggest companies we have seen have been the ones that were sitting on  cash. We’ve seen a lack of small businesses. One of the ways small businesses have traditionally gotten started is with people borrowing equity against their house, but there’s very little of that because no one has equity in their house. It’s a cycle we’ve got to turn around. What we need is a new economic driver. We have been in the business of growth for a long time and by that we mean punch a new road in, put in a new subdivision and the retail that goes with it. It’s going to be things like biotechnology. Georgia Tech had no biotechnology program 10 years ago and right now it’s ranked the number two program in the country. It could be the kind of thing that spins off all kinds of activity. We need to be the engines for the future, and it could come from the universities and the commercialization of those ideas. Georgia Tech, the CDC and Emory, those three give you the weight and critical mass. If you get something going here, it’s going to take. It’s not going to happen overnight, but there are more than 200 biotechnology companies in Atlanta and none of them are household names. Some of them are going to get big. We’ve got to start thinking about what’s going to be a big driver. Why is Nashville doing well? Because you’ve got medical capital, universities, and automotive. What are the industries of the future? Not the ones that we built Atlanta on, those are still going to be there and going to grow. But what are the ones that are going to fill this void? That’s one of the things we need to do. There’s been a whole lot of waiting on it to come back. We’ve got to invent a new ‘it.’

Doughtie: We have companies moving here from Japan but they are also coming from other parts of the U.S. Where are you seeing those companies come from?

Roberts: Really all over. We see California and Florida. We had companies relocate after the hurricane 2 or 3 years ago. There are also data centers; we’re seeing more of those. We have seen companies from New York since the early 2000s. Germany is probably the strongest I see in terms of international investment, but don’t underestimate Japan and South Korea.

Brown: It’s Fortune 250, pretty much as simple as that. There’s been some hit and miss mom-and-pop. We’ve seen some consolidation. It’s all big companies that are trying to lower costs.

Doughtie: So everybody’s trying to go to their bottom line. Pat [Murphy], what about the kind of tenants you’re seeing?

Murphy: We deal in smaller spaces than Chris [Brown]. We see a lot of mom-and-pops, and there’s actually some expansion going on in smaller companies. They had 10,000 square feet and now they need 15,000 square feet. It’s good business. Food is a big one. I’ve seen more food deals than I’ve seen any year I can remember. International companies. I still see telecom. My sweet spot is 10,000 to 60,000 square feet, so I’m not dealing with the bigger boxes.

Doughtie: The other thing also that we’ve seen is a lot of these guys were sitting on the side, because they were scared. With competitors going out of business, they had a chance to pick up some market share, and they can do it while the rates are down.

Murphy: A lot of them want to buy buildings too. There’s a lot of people who have money in their pockets, and they are reading how cheap buildings are and shopping for them.

Doughtie: When you talk about where we are in the cycle, I ask them why they are looking to buy now, and they say, ‘How much lower can it get?’ We need to move forward. However, when you look at last year, the 1-year deals, lend and extend, sales almost are waning, and the difference this year is we’ve seen 3-, 5-, 10-year leases, and sales.

Murphy: The last few years we’ve been doing lots of short-term deals. In 2006 and 2007, we were doing 5- and 7-year deals, it’s all coming to a head pretty soon. There’s going to be guys who are in a 10-year deal timed up with a guy in a 2-year deal. So there’s going to be a lot of people in the market, and the best spaces are going to be up for grabs. That may create a bit of a demand that we haven’t seen the past couple of years.

Haynes: It’s a little bit of an anomaly. We’ve actually, by the end of this month, closed our third manufacturing sale in the last couple of months, which is really bizarre. We don’t sell too many manufacturing plants but these are three sales, one’s a mom and pop, one’s a mid-size and one is large. Two of them are with heavy incentives, the other was not. That’s been a little surprising. We’re also seeing these small manufacturing deals that people are buying so where are they getting the money. That’s a good sign, let’s just hope it continues to build.

Doughtie: There’s a lot of money out in the marketplace looking for opportunities.

Haynes: I think that’s part of it. Right now is an opportune time if you’ve got any kind of pent up demand, now is the time to do a deal. Not waiting 2 or 3 years until the market changes. It’s still a buyer’s market, a tenant’s market. You can just about write your own lease because it’s just where we are in this cycle. They are user sales. One is about a 50 percent reduction, one is about 30 percent and the other is about the same. To me, these are scary numbers because of the sale price per foot. We need to get rates and prices up. We’re selling and leasing a lot of discounted space. Just think of our income levels. We have to make twice as many deals to make up for the income we were making in 2006.

Murphy: Our capital markets guys are predicting a big fourth quarter in Atlanta. They are predicting a number of sales.

Koenig: I understand that the investment rate is a little different, and some of that is not at a great discount. Not the core properties. Cap rates are pretty low — back where they were in 2006.

Doughtie: Isn’t that amazing? When the capital markets went to hell, who would have thought? For the Fortune 500 company that’s on a 15-year lease in a big box, it could be a 5 or 6 percent cap rate.

Brown: That’s a function of how terrible the economy is.

Doughtie: John [Rooker], I know you just sold a building up in Jackson, [Georgia]. It wasn’t an investment sale though.

Rooker: It was a developer. They saw a good opportunity. In that market specifically for us, we have one building too many out there. In October or September of 2005, there were 3.5 million square feet of empty big box space. That was all gone on January 1, 2006. So we all look at each other and start doing the same thing and you miss a couple deals because of timing and size. You’re left standing there holding a bag. But they see opportunity in that market just as we do; we still have 400 acres up there that we hopefully will develop. But it’s going to be a while. We haven’t seen a lot of those big box retail guys coming back to take spaces yet. Hopefully they’ll be back. But right now we’re seeing manufacturing, international and food.

Doughtie: Ronnie [Wenzler], you were talking about healthcare. Who else is doing deals in Nashville?

Wenzler: It’s interesting to me as I sit here and think about the things that I’m working on. I have a contract manufacturer that has probably 200,000 feet now. We’re going to go out and try to double their space at this point. The business is growing and they want to consolidate into a single facility from several. They are going to buy. I’ve done a lot of work with Gibson Guitars. I’ve been working on something with them for the last several months. They are a great company, Nashville headquartered.

Doughtie: Kent [Mason], what have you seen from a tenant standpoint?

Mason: It has been across the board. We just did a deal with a Belgian company. It’s a small deal, but it’s their first facility in the U.S. They picked the land and decided to start out small. This is just a sales operation. On the negative side, we lost a tenant on the south side. We talk about how regulation is coming into production plants and making them put safe guards around the machinery. The regulation impacts their competitiveness because they are not being regulated to that level in China. Regulations stifle and slow down. Certainly there are regulations that are needed, we want clean water and air, we don’t want to have workers get injured, but we’re no longer in the industrial dark ages. Manufacturers know how to keep workers healthy and happy.

Doughtie: I think a lot of it is uncertainty, they don’t know if they’re going to be taxed and those kinds of things.

Mason: We did a deal in Conyers recently that’s a solar energy manufacturer. Forget everything you hear, solar energy is real and it’s here to stay. There are major installations being built out west. This company makes mobile units that go on site at sold installations that transform the energy from a certain voltage to a transmission voltage.

Roberts: We’ll see more of it. We were in South Carolina on Interstate 95 in Charleston for that deal and we just had better lookers there and the market was better. We can get the manufacturing but if we don’t have the work force that’s really the issue. That was really the problem in Forsyth County. If you’re looking at K-12 instead of K-16 and those silos that are built between the technical college and the university Board of Regents schools, they need to come down and look at educating the student all the way through. Athens Tech for instance, 30 percent of their enrollment at any time already have a 4-year degree. They are coming back to school to get something they can actually get a job with. That’s where your Quickstart goes, not to the liberal arts educated person but to the technical where now you can actually get a 2-year associates degree at a technical college and then transfer to a Board of Regents school. We’ve got to start saying to our high school students, it’s not just to get a college degree, it’s to find a place and be trained to work.

Doughtie: Rodney what have you seen in the marketplace in terms of tenants?

Davidson: It’s the same, we’ve seen some bigger spaces. Some manufacturing, food, similar products. We’re starting to see a little bit more mom and pop activity but that’s still slow.

Doughtie: I wanted to make sure we got to talk about the Panama Canal. Bob [Robers], can you talk about Savannah, Georgia?

Robers: I had a great opportunity to visit the Panama Canal with the port authority in April with a group of people inside our company. You can see any which way that they know what’s coming. It’s just a remarkable feat in engineering and construction. It’s just amazing. [Editor’s note:  The Panama Canal is undergoing an expansion that will allow wider and deeper ships to travel through the canal. U.S. ports must be able to accept these ships to take advantage of the increased capacity. The most surprising outcome for me was sitting in the boardroom of the Port Authority and their criticism of U.S. Policy. They can’t comprehend that you can’t mass enough support. It’s a relatively small investment when you see the return. So when it comes to the port of Savannah, I remind them to try to be objective. There are opportunities that we are missing right now. The link is between economic development and the Georgia Port Authority is not there. We have a tremendous opportunity; we could be leaps and bounds ahead of where we are right now in the Port of Savannah in preparation for the Panama Canal expansion. They spent $40 million on studying and analysis. You see it from an outsider’s perspective when you get in the board room and they say ‘It’s coming, why won’t you be ready?’ You’ve got 4 years. The reality is the deepening will happen, Savannah is already a winner; it will continue to be a winner. It out-classes the other ports on the East coast. It has the best ports of call, a balance between import and export, but there are missed opportunities from a policy standpoint. A tax would actually fund it and pay for it on a per container basis like they do on the West coast. The money is there to invest in the port.

Doughtie: What do you think it’s going to cost?

Robers: The state has allocated their funds and they are trying to wait for the federal government to come around to get their share of the funds.

The question is: how do we set ourselves up to take the volume that’s coming? It’s just a matter of clearing the way and having fertile ground to foster the imports and in turn foster the exports. Manufacturing drives it and most of the projects we are dealing with have a manufacturing tone to them. That’s something you can’t reproduce. It’s already an advantage. Why we don’t take more advantage of it is concerning. You’ve got a 3- or 4-year window when we should be taking steps to prepare and have the next manufacturing sites ready. I think the federal government will eventually help, it’s going to rely on diminished funds, some quasi public/private partnerships to get us over the top. When you’re $100 million away from $1 billion in benefits you find ways to make it work. Atlanta is going to be an obvious winner on the import and the export because the rails have next day service to Atlanta, which is perfect for all distribution accounts.

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