Amid redevelopment spree, Denali retains small suburban warehouses

As a redevelopment renaissance sweeps through areas once known as industrial strongholds, small warehouses and flex office space near the urban core have become scarce commodities.

The limited supply of space in the market, partly caused by dwindling land availability in built-out urban and suburban areas, translates into strong rent growth for property owners. It’s why industrial players like Michael Godin and Jason Chaliff with Denali Investment Group are scooping up these buildings, which other real estate firms often see as prime opportunities for converting into apartments or retail.

In late May, the local investors purchased three light industrial and flex properties in Douglasville, Marietta and Roswell. It paid three individual sellers a total of $31 million for the multi-tenant buildings, all of which hold a combined total of 51 businesses.

The strong demand for light industrial and flex space corresponds with strong rent growth, attracting investors like Denali Investment Group.

“These buildings are the perfect candidates to be torn down or converted to a higher density use,” said Godin, managing director of Denali and managing partner of Elmo Enterprises. “Naturally, you have a lot of this flex space shrinking.”

Light industrial and flex buildings often cater toward local or regional businesses, like plumbers, artists or cabinet makers. These users need close proximity to their customer bases, unlike the industrial tenants moving into the massive logistics and distribution centers coming online on the outskirts of metro Atlanta.

Strong population growth is the simplest contributor to the need for space. The pandemic encouraged some people to start home businesses, Godin said, in which entrepreneurs later needed to expand with a bit of office space or small loading dock. That’s the situation of a small manufacturer of hair extension products that leases space in one of the buildings recently acquired by Denali.

The diverse mix of users protects investors in times of economic uncertainty, Godin said, as not all businesses are guaranteed to fall out of favor in the event of a downturn. Heating-and-air companies, for example, would still be in high demand during the sweltering Atlanta summer.

By splitting multiple tenants between a single building, it lightens the burden of replacing one of the users if they choose not to renew their lease. Big-box facilities allow investors to make more on each lease, but they often come with longer leases and lower rent escalations compared with light industrial and flex space.

In the first quarter of this year, flex users across metro Atlanta paid an average rate of $11.69 per square foot, about twice as much as warehouse or manufacturing users, according to research from commercial real estate services firm Colliers International.

Businesses leased more than 138,000 square feet of vacant space, while developers only added about 100,000 square feet of new space, according to Colliers. About 2.3 million square feet is under construction across the metro area, though it now takes longer to finish facilities due to supply chain disruptions and permitting delays.

The ripe demand for new apartments has pushed developers to consider repurposing older industrial buildings, which are often located on large tracts of land. Consider the rise of mixed-use projects in West Midtown or Chamblee, two pockets of metro Atlanta once known for warehouses. Adaptive-reuse puts a drop in the bucket toward the housing shortage, but it also weakens the supply available to industrial users.

Here are the properties purchased by Denali on May 27:

  • Holcomb Bridge Business Center in Roswell: The investor purchased approximately 70,000 square feet of space from Bier Associates Strategic Advisors for about $10.3 million.
  • Parkway Business Center in Marietta: The investor purchased approximately 39,000 square feet of space from Capkey Real Estate for $7.25 million.
  • Burnt Hickory Industrial Center in Douglasville: The investor purchased approximately 90,000 square feet of space from High Street Logistics for about $13.4 million.

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