New industrial demand in the Washington, D.C., metropolitan region has come not only from its strong service economy, but also a rapidly growing consumer goods supply chain, e-commerce distribution seeking speed of delivery, data centers and even government contractors. Both occupiers and investors seek modern, state-of-the-art building design and features.
The Washington metro industrial market (185 million square feet inclusive of flex space) was well into the single digits with a sub-9 percent vacancy rate as of the third quarter of 2015. New construction has returned with 2.7 million square feet poised for delivery. The overall market is fairly balanced between suburban Maryland and Northern Virginia comprising 88.3 million square feet and 87.3 million square feet, respectively. The remaining 9.3 million square feet is located in the District of Columbia.
Vacancy has been on a downward trajectory for the region as a whole. The current 8.8 percent rate represents a drop of 100 basis points compared with the third quarter of 2014. The largest industrial market is found in Prince George’s County, Md., and totals 52 million square feet of industrial and flex space. Prince George’s County also anchors the south end of the Baltimore-Washington I-95 Corridor. If the adjacent Baltimore Metro market is included with Washington’s inventory, the Greater Baltimore-Washington industrial market totals 389 million square feet and has a healthy 9.1 percent vacancy rate.
Jessica Mistrik, Avison Young
Speculative development is well underway in the region. The bulk of the new construction in the warehouse/distribution sector is in Loudoun County, Va. (1.4 million square feet) and Prince George’s County (700,000 square feet). Market fundamentals support this, considering both markets’ access to airports, major transportation corridors and the lack of developable land that has kept new deliveries in sync with absorption.
In particular, Loudoun County’s Dulles North submarket has experienced strong pre-leasing during construction. Pre-leasing has included a mix of secure facilities for the government contracting sector and warehouse/distribution spaces leased largely by third-party logistics (3PL) groups. Recently, Raytheon pre-leased 156,000 square feet at 22921 Ladbrook Drive, part of Broadstreet Equities’ 340-acre master-planned Northwoods business park. As of third-quarter 2015, vacancy in Dulles North was 6.7 percent, down from 10 percent as recently as year-end 2013. Other significant activity in 2015 has included Vadata Inc.’s 139,000-square-foot data center lease at 22520 Randolph Drive with First Industrial Trust in Dulles North and leases by Safeway (136,000 square feet at 6300 Columbia Park Road) and Benjamin Moore (89,000 square feet at 1811 Cabin Branch Drive) in Prince George’s County’s Landover submarket.
Source: Avison Young
(Total market inventory of flex and industrial, inclusive of owner-occupied; direct space; NNN rent)
The Greater Washington third-quarter overall industrial average asking rent was $9.68 per square foot on a triple net basis, compared with $9.45 per square foot one year earlier. The highest overall asking rates were achieved in Montgomery County, Md. ($12.88 per square foot) and in Virginia’s Alexandria/Arlington market ($12.60 per square foot). With respect to property types, the average asking rent for flex space was $12.58 per square foot triple net and averaged $8.34 per square foot triple net for warehouse/distribution product.
Strengthened leasing market fundamentals have created a healthy investment market for industrial product in the Washington metro area and an advantageous environment for sellers. Strong market acceptance by institutional buyers has pushed pricing higher in many submarkets. The average price for industrial assets in the Washington Metro region was $153 per square foot for the 12 months leading up to October 2015, up 32 percent from a year prior, according to Real Capital Analytics. With an abundance of capital chasing limited offerings and heightened competition among buyers, cap rates for sales this year have declined to the mid-6 percent range. Cap rates for newer product can be even lower.
Buyers have shown increased interest in older, less functional properties as well. Limited options in close-in markets have resulted in a rise in repositioning and redevelopments in older product. The recent sale of 1323 Wilkes St. in Alexandria is evidence of this trend. The warehouse, built in 1960, was sold in June 2015 for $275 per square foot. The property was rezoned prior to the sale, and the existing 40,000-square-foot industrial building will be razed and replaced with a new townhome development. Moreover, as established submarkets have experienced rising prices for both land and existing buildings, interest in outlying or emerging markets, such as Hagerstown and even West Virginia, has grown. For example, Procter & Gamble has announced that it plans to build a new $500 million manufacturing plant on 450 acres in Berkeley County, W.Va.
Washington metro’s industrial market continues to demonstrate strong fundamentals and remains among the top target markets for investors nationwide. With solid demand for limited available stock and new construction constrained, the positive outlook for stable rents and high occupancy rates should continue for the foreseeable future.
— By Jessica Mistrik, Research Manager, Avison Young. This article was originally published in the November 2015 issue of Southeast Real Estate Business.