Luci Joullian

National industrial vacancy rates have risen slightly this year compared to last and manufacturing continues to struggle, but there may be a light at the end of the tunnel for the Southeast’s industrial developers. This development sector, usually quick to respond to economic ups and downs, is already seeing signs of recovery, which could come to fruition by the end of this year or the beginning of 2004 as developers scale back on developing speculative space and stick to build-to-suits.

Central and South Florida

Much of South Florida is facing a land crunch caused by natural barriers and over-development, which is pushing sale prices and rental rates sky-high.

“With any land acquisition in Broward and Dade counties, the pricing is so high that it’s very difficult to justify rental rates,” says Scott Helms, vice president of development and district manager for the Fort Lauderdale office of Atlanta-based developer IDI. “If there is land available, there are developers in place to grab it up very quickly.”

Helms continues, “South Florida is very different from markets like Atlanta and Dallas where there’s unlimited land and you just continue going further and further out to develop land.”

Broward County, in particular, is feeling the effects of high vacancy rates and lowered net absorption. The county, which is almost completely built out in the east, should soon see more of a focus on redevelopment and development pushing out toward its western borders.

Last March, IDI’s Fort Lauderdale office purchased Miramar Center in Miramar, Florida. The 68-acre park, located off of Interstate 75, includes two industrial buildings totaling 147,000 square feet. In May, IDI leased one of the buildings to Caremark, a pharmaceutical wholesale supplier. The other building is currently 50 percent leased to two other tenants. IDI also is in the process of adding two more buildings to the park — one approximately 80,000 square feet and the other around 55,000 square feet — which will break ground in October and be complete within 6 months.

“A lot of our product has been geared toward the larger, national corporate tenants and that market is a little bit slower than typical just because of the national economy,” says Helms. “So we are doing more of the smaller buildings right now, relying more on the local and regional economies.”

Jackson, Mississippi-based EastGroup Properties, which has regional offices in Tampa, Fort Lauderdale, Orlando and Jacksonville, Florida, also has begun providing its buildings with a higher degree of flexibility to house a variety of tenants. EastGroup’s current focus is on multi-tenant business distribution properties averaging around 80,000 square feet. With vacancy rates at over 8 percent in some areas of South Florida, “We build our space to be as flexible as possible and to appeal to many different types of tenants,” says David Hoster, president and CEO of EastGroup.

In Fort Lauderdale, EastGroup is currently leasing the two completed components of its Executive Airport Commerce Center and constructing a third building.

“Industrial development is slowing many Florida markets, in some cases because people thought the recession was going to be short-lived and they kept building,” says Hoster. Despite the current slowdown, he predicts a turnaround by early to mid-2004. Of the South Florida market, Hoster adds, “There’s not real weakness, there’s just not any real strength.”

Central Florida has more room for growth than the southern part of the state. And though vacancy rates rose slightly in the first quarter of 2003, mid-Florida markets like Orlando have remained stable compared to other southeastern markets. Construction has slowly started to pick up again, along with rental rates, although net absorption is still negative. Tampa is facing absorption problems, though not to the same extent as Orlando.

EastGroup Properties’ Orlando office, which handles activity in the Orlando, Tampa, Jacksonville and Pompano areas, recently completed construction of the 63,000-square-foot Sunport IV building in its Sunport Commerce Center in Orlando, with plans to build two more buildings in the development.

Indianapolis-based Duke Realty, which has Florida offices in Tampa, Orlando, Fort Lauderdale and Miami, is constructing a 1.35 million-square-foot bulk warehouse/distribution center for Lowe’s Companies in the Orlando suburb of Poinciana, Florida. Scheduled for completion in January 2004, the 150-acre center marks the 11th time Duke and Lowe’s have worked together on an industrial project.

Atlanta

Atlanta’s industrial market has seen better days. Vacancy rates have been on the rise, with a very slight decrease in the first quarter of this year. With so much extra space, landlords are being forced to make concessions to keep occupancy up and many developers have delayed their plans for new speculative projects. With job growth expected, though, the city could begin to see a turnaround in 2004.

“There are areas in the market that show little signs of improvement, but the velocity of prospects has increased lately,” says Dayne Pryor, operating officer of the Atlanta office of Sacramento, California-based Panattoni Development Company. “I believe the companies searching for space have received approval to make their deals and are putting forth a genuine effort to do so.”

Panattoni currently has a 375,000-square-foot cross-dock building under construction along Fulton Industrial Boulevard. The facility is expected to be complete by this September.

Last year, Panattoni gained recognition for its development of 30 acres of speculative space on Kendall Park Lane and its subsequent 408,600-square-foot, 15-year, $20 million lease to Acuity Specialty Products, a leading provider of specialty chemicals, which chose the location as its national distribution center.

Raleigh

Of all the Southeast industrial markets, Raleigh-Durham, North Carolina, may have one of the most uncertain futures. With flex and warehouse vacancy rates topping 20 percent and negative net absorption, the road to recovery may be a long one. As massive amounts of warehouse space remain from the over-development of the last 5 years, just as in Atlanta, Raleigh landlords are forced to make concessions to lure tenants. Much of the city’s warehouse space also remains vacant due to a similar economic stroke of bad luck and the exodus or downsizing of major industrial tenants.

Fortunately, the development of both flex and warehouse space has slowed to a trickle and now the area must simply wait for job growth and the subsequent return of tenants.

Those companies that are developing in the area seem to be primarily dealing with build-to-suits. This June, Duke Realty broke ground on a new 150,000-square-foot national headquarters, distribution and warehouse facility at Walnut Creek Business Park in Raleigh for Harris Wholesale, North Carolina’s second largest distributor of Anheuser-Busch, Budweiser and Michelob beers. The headquarters and warehouse facility is scheduled to be complete by April 2004.

In the Raleigh suburb of Morrisville, Duke is constructing Woodlake VIII, a 48,000-square-foot distribution/light manufacturing facility at Woodlake Center, a 54-acre industrial development featuring six distribution/light manufacturing facilities totaling approximately 769,200 square feet. Dal-Tile, the country’s largest ceramic tile manufacturer, has agreed to occupy 50 percent of Woodlake VIII upon its scheduled completion this November.

Memphis/Northern Mississippi

Memphis, which suffered from negative absorption rates, declining rental rates and slowed construction throughout 2002, may be headed for brighter days as increasing numbers of lessees look for big box space in the city’s broad-based distribution market of automobile, pharmaceutical and electronics industries.

“We entered a recessionary cycle in the first part of 2001 and we are just now starting to come up out of that,” says Al Andrews, operating officer of Panattoni Development’s Memphis office.

“2000 was our last strong positive net absorption year, when we had almost 7 million square feet of positive net absorption. In 2001, it was a little under 3 million. In 2002, we had negative 600,000 square feet of net absorption. That gives you kind of a snapshot picture of the market,” he says.

Despite the discouraging numbers, Panattoni’s Memphis office scored a large industrial lease last December when Thomson Multimedia leased 922,500 square feet in the Memphis Oaks Distribution Center.

“From everything I’ve been able to discern, this is the largest single distribution square-foot lease ever made in Memphis or Shelby County,” says Andrews.

The lease of the facility, which comes as a result of consolidations of Thomson subsidiary Technicolor, will serve primarily as a post-manufacturing packaging operation for DVDs shipped from Mexico, California and Illinois, and will be capable of packaging more than 475 million DVDs by 2005. Panattoni completed work in June to expand the building by 270,000 square feet.

Also in June, the company signed a second build-to-suit for Thomson at Memphis Oaks. Panattoni has begun construction on the 806,000-square-foot building, which will be complete by the fourth quarter of this year.

Panattoni’s Memphis office also opened a fourth building — a 372,800-square foot speculative building — in Memphis’ 125-acre Eastpark Distribution Center in August.

In northern Mississippi, just over the state line from Memphis, IDI has leased 177,039 square feet in its Airways Distribution Center to Phoenix-based Retail Wireless Inc., which is moving its central distribution center to the Southaven, Mississippi, office park.

Panattoni recently sold two parcels of its 125-acre Desoto Business Park to W.W. Granger and has plans to develop 25 additional acres of land there. “There’s a lot of development going on in the north part of Mississippi,” says Andrews, “particularly in Desoto County.”

“As a company here in Memphis, we are very pleased with the activity that we’ve been able to do during a recessionary cycle,” notes Andrews. “The question is, where are we going to be at the end of 2003?”

©2003 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.