Historic Level of Demand Meets Low Availability in Metro D.C. Industrial Market
As online shopping and a stack of newly delivered boxes by the door have become common in many American households, the behind-the-scenes institutional supports that make these habits possible have transformed the country’s real estate markets. The booming demand for data centers and last-mile staging for e-commerce is driving steady interest in industrial spaces, which shows no sign of waning.
Since 2009, the industrial market has experienced 767 percent growth across the United States, surpassing retail to become the third ranked commercial real estate product type by sales volume. This sustained demand is outpacing limited availability, compressing capitalization rates to historic lows. In the metro Washington, D.C., area, there are a number of unique factors that contribute to this trend.
High urban property values in the District itself have led to the conversion of a significant percentage of available warehouse space to other uses over the last decade, pushing industrial development into neighboring areas of Northern Virginia and Prince George’s County, Maryland. Many of the sites most easily suited for industrial purposes have already been developed, leaving higher barriers to entry and very few new options.
As commercial businesses and government agencies adopt increasingly sophisticated technologies — like cloud computing, artificial intelligence, virtual reality, autonomous vehicles and cybersecurity — the demand for data centers in the region to store and process information has exploded. Such a concentration of computing power has generated significant investments from high-profile defense, technology and government contracting companies that use and support this data. In Northern Virginia particularly, where infrastructure routes 70 percent of the world’s internet traffic, data center demand is driving a very tight industrial real estate market with soaring prices.
In Prince George’s County, the number of square feet currently under development is at its lowest in nearly a decade, primarily due to diminished supply of suitable land rather than any reduced appetite from the development community. While some rezoning and redevelopment is being explored, new products coming to market are rare and highly anticipated, and strong preleasing interest is contributing to continued low vacancy rates despite new completions.
Co-owners Normandy Realty Partners and The Pinkard Group are redeveloping 716 Ritchie Road in Capitol Heights, a former American Rescue Workers assistance center, as a 160,000-square-foot, last-mile industrial warehouse. Located inside the Beltway in close proximity to the downtown area and the forthcoming Amazon HQ2 in Crystal City, Virginia, this new venture is one of the only large industrial developments slated for delivery within the next year.
While industrial space has historically been dominated by retail and manufacturing tenants, the market shift toward e-commerce has opened competing demand. As online shopping patterns evolve, customers accustomed to on-demand service are drawn to faster delivery — often next or same day. Meeting these speed demands and reducing the fuel costs for long delivery routes has led to a proliferation of fulfillment sites adjacent to population centers, with complex systems for inventory management and processing mail-in returns. As more companies expand their e-commerce offerings, it will only increase pressure on industrial markets.
This pressure is driving some innovations in the market as companies explore multi-story spaces to maximize efficiency, enhanced electrical support through rooftop solar power and the integration of technology and automation capacity to make spaces even more attractive and efficient for tenants. On the leasing end, marketing a collection of smaller spaces spread over a larger geographical area may allow companies to serve more tenants and provide the critical last-mile logistical connectivity consumers demand.
Regardless of any potential fluctuation in other economic areas, the climate for industrial real estate has never been stronger and the thirst for data center and last-mile proximity will continue to drive demand for quality industrial spaces throughout the D.C. metro area for the foreseeable future.
— By Brian Kruger, Senior Managing Director at Newmark Knight Frank. This article originally appeared in the November 2019 issue of Southeast Real Estate Business.