The nondescript warehouses and distribution centers huddled along the Southeast's many interstate highways are hardly awe-inspiring. Still, these properties will lay the groundwork for a stronger commercial real estate market in 2004, according to real estate experts.

Real estate investors are quick to note that a broader recovery in the commercial real estate market typically begins when companies start seeking warehouse and distribution space. Moreover, Atlanta is once again leading the nation in new job growth. The Atlanta region was expected to create 32,100 new jobs in 2003, according to Dr. Rajeev Dhawan, director of Georgia State University's Economic Forecasting Center. And in 2004, he says that metro Atlanta is projected to create 55,400 new jobs.

Several large industrial leases have been signed over the past couple of months in metro Atlanta, a clear sign that this recovery has legs. Electronics manufacturer JVC will take 404,000 sq. ft. at Carter & Associates' New Manchester Distribution Center in suburban Douglas County. Maintenance Warehouse, a Home Depot company, leased about 378,000 sq. ft. at Majestic Norcross Center in Gwinnett County.

“The [Southeast] commercial market may be showing signs of life for the first time in about four years,” says Roger Tutterow, an economist at Kennesaw State University. “It's been pretty much DOA (dead on arrival) since about 2000.”

Tutterow believes that the industrial market should rebound in short order. “They could start cutting into that vacancy pretty quickly,” he says. The industrial market can turn around more quickly than the office market because of the shorter period of time it takes to build warehouse and distribution space. A typical warehouse building can take six months to a year from start to completion vs. at least two years for a major office building. As a result, developers were able to curb new supply at the first sign of the slowdown in late 2000.

Manufacturing As Growth Industry

As manufacturers receive more factory orders, production has increased — and an uptick in industrial leasing deals has followed. That is vital to the South, which is more dependent on manufacturing jobs than other parts of the nation, according to Tutterow.

More production means greater demand for storage and distribution space. “Markets along the Southern coastline have shown clear signs of recovery,” states a report from Cushman & Wakefield. “Economic indicators in the South have been rising in sharp contrast to other regions of the country, particularly in the areas of industrial production, employment trends, increases in personal income and population growth.”

Indeed, Atlanta led the nation in the total amount of industrial property leased and sold through October, reports Cushman & Wakefield. Leasing and sales activity also picked up across Florida, especially in Orlando and West Palm Beach.

“Strong exports of chemicals, textiles and computers are fueling the South's rebound,” says Pamela Zoellner, Cushman's senior managing director of Industrial Services. The region also benefited from increased defense spending, as 15% of defense expenditures last year went to contractors and military bases in the South.

The Southeast will bounce back in 2004 because the same qualities that nurtured boom towns like Atlanta in the late 1990s still exist, says Patrick Henry, a partner at Trammell Crow Co. He believes that Atlanta and other Southeast cities can boast of a high quality of life, strong labor force with good infrastructure and a diverse economy.

Adds Henry: “All the reasons that made these towns boom towns in the 1980s and 1990s are the same ones that are attracting businesses back and will fuel new growth.”

Next Boomtowns

Two markets north of Atlanta, Raleigh and Nashville, are poised to become boomtowns in the next couple years, Henry says. The expected increase in research and development spending along with demand for research parks should benefit Raleigh, he says. Nashville's quality of life and ability to attract young professionals have left the Music City well positioned to capitalize on the impending economic and real estate rebound.

Charlotte, however, relies heavily on the financial services industry, where consolidation is expected to continue. “I don't know that it will have the robust growth that Raleigh will,” Henry said. “I'm a little more cautious about Charlotte.”

Back in Atlanta, King Industrial Realty Chairman Charlie King says the city's 430 million sq. ft. warehouse/distribution market has turned the corner. The market had net absorption of 23,960 sq. ft. in the third quarter. King acknowledges that figure isn't usually something to brag about, but on the heels of two difficult years it represents hope.

“I never thought that I would get excited about 23,960 sq. ft. of positive net absorption,” says King. “But hopefully it's a sign that we have turned the corner.”