Nearly three full quarters into the COVID-19 pandemic, no real estate asset class in the Washington, D.C., metro area has shown less macro-level distress than the industrial market. In fact, the industrial market may have actually benefited from the pandemic.
Despite the immediate drop in demand and activity that resulted in the second quarter, the metro industrial market has bounced back and posted positive gains in both leasing activity and new construction. No other asset class can claim that in the D.C. area.
Bert Harrell, Avison Young
Much of the industrial activity is centered in Northern Virginia, but Suburban Maryland has remained healthy as well. At the end of the third quarter, the overall vacancy rate for warehouse/logistics space, flex and service center industrial buildings stood at 6.2 percent.
Unlike many industrial markets, the Washington, D.C., MSA is a service economy with more than 260 million square feet of space. Early industrial development around the Capital Beltway/Interstate 495 served to support an ever-growing population base driven by the federal government and its contractors. This, however, has changed in the past decade, with high-tech companies entering and dominating the market.
Fueling D.C.’s healthy market is its high barrier to entry. Much of the development that occurred in the past 30 years moved west from Virginia’s Fairfax County into the Loudoun County and Beltway centric submarkets. During that time, new development in Suburban Maryland near the Capital Beltway/I-495 was absorbing the last meaningful land inventory around more established industrial parks close to the interstate.
Driving much of the demand in Virginia is the data center industry. Enterprise and colocation data centers with names like Amazon Web Services (AWS) and Digital Realty have completely impacted the ability to develop new industrial inventory. Ashburn, located immediately north of Dulles International Airport, is now the largest data center market in the country. Over 70 percent of the world’s internet traffic flows through Ashburn, and there is now more than 10 million square feet of data centers in Loudoun County alone.
All of that development has pushed prices to over $2.2 million per acre for industrial-zoned land. Few industrial developers have land inventory around Dulles Airport or in submarkets close by.
Any inventory is in high demand as triple-net rents are in excess of $10 per square foot. Northwoods, an industrial park near the airport being co-developed by Northwestern Mutual, Broad Street Equities and the Ardent Group, is one of the few projects delivering speculative Class A buildings to the market. Absorption and activity are solid with Raytheon committing for 64,000 square feet recently.
Prince William County in Virginia is also experiencing the data center explosion but less so, allowing developers such as Merritt Properties to build the 597,000-square-foot Merritt I-66 Business Park located immediately off Interstate 66 near Manassas. In the first quarter, Wayfair preleased 137,000 square feet. With Merritt’s last building of 97,000 square feet nearing completion, shell rents are hovering near $9 per square foot.
West to the Interstate 81 corridor, the pipeline for new projects is limited as well. Equus Development recently delivered a 480,000-square-foot spec building that was leased by Geodis. The I-81 corridor location offers tenants cost-effective space to serve those using I-66 as their primary means of access.
Maryland is also seeing strong activity. In Prince George’s County, Columbia Realty is constructing a Class A, 160,000-square-foot building at 7610 Richie Road in Capital Heights. In Frederick, Lincoln Property Co. is delivering 215,000 square feet at Jefferson Station at the corner of Interstate 70 and U.S. Route 15.
Beyond new development, existing parks in Prince George’s County have experienced rent growth in excess of 5 percent per year for the past two years, reflecting the tight market in the D.C. area.
With limited land, the D.C. industrial market has about 2.8 million square feet under construction, with 55 percent of the new construction preleased.
What does the future hold? With the high barriers to entry, look for steady rent growth and the redevelopment of existing functionally obsolete buildings. New development will remain a challenge, as will finding land or a sizable group of buildings to acquire. With a diverse tenant base, demand is sustainable.
No matter the economic or political environment, Washington, D.C., will remain a solid place to invest.
— By Bert Harrell, Principal, Industrial Sales and Leasing, Avison Young. This article originally appeared in the November 2020 issue of Southeast Real Estate Business.