The 195 million-square-foot Washington, D.C., metropolitan industrial market features various sectors and centers of demand across the region. The overall market has been extremely healthy, with unique forces impacting the area’s primary regions of Northern Virginia, Suburban Maryland and Washington, D.C.
The overall metro market expanded between first-quarter 2017 and first-quarter 2018. Net absorption in the period was 1.7 million square feet, albeit a significant slowdown from the previous 12-month cycle (4.2 million square feet). After falling significantly during the past five years, vacancy remained relatively flat in first-quarter 2018 and settled at 6.8 percent, a 10-basis-point drop year-over-year.
Jessica Mistrik, Avison Young
A lack of available space limited opportunities for occupancy gains but allowed owners to increase asking rents. The average asking rent rose sharply to $10.04 per square foot, up from $9.58 per square foot one year earlier. Of the 1.9 million square feet of new supply under construction, 1.3 million square feet was in Northern Virginia’s less constrained but in-demand Loudoun County. Overall new supply was 55 percent preleased at the end of the first quarter.
The Washington metro industrial market inside the Interstate 495 Beltway contrasts in many ways to the market outside the Beltway. The most significant difference is the degree of land-constraint. Developers looking for the “highest and best use” for a parcel of land often look to residential or office. That has led to the demise of industrial product in Washington, D.C., proper, which comprised only 9.4 million square feet of inventory (4.8 percent of the total market), as of the first quarter. The bulk of logistics developments are located near the major interstate corridors in Northern Virginia (93 million square feet) and Suburban Maryland (92.6 million square feet).
Source: Avison Young Research
Much of the recent activity in the region was related to Big Data firms entering the market to take advantage of the low-latency connections in the Dulles Technology Corridor of Loudoun County. In Northern Virginia, 1.5 million square feet of new industrial supply was under construction at the end of the first quarter, and 83.7 percent was concentrated in Loudoun County. The county’s Route 28/Dulles Corridor North submarket is home to a concentration of data centers, as well as the Dulles International Airport, which is the primary driver of logistics expansion in the region.
Security and quality demands are leading data-center specialists to shift toward greenfield investments that provide hyperscale opportunities by purchasing large tracts of land for multi-phase campus development. In addition to demand from the private sector, the federal government’s further usage of the cloud should continue to drive market expansion. The U.S. Department of Defense recently began the bidding process for a cloud-services contract, which is expected to be worth billions of dollars and go to a single bidder.
Also central to the D.C. industrial market, the Interstate 95 corridor is a primary logistics route for the East Coast that spans the region and connects Washington and Baltimore. Limited availability and development constraint are the primary issues facing large-block users hoping to be close to Washington, leading construction inside the Beltway to be concentrated in Suburban Maryland’s Prince George’s County. Of the 436,000 square feet of new supply underway as of first-quarter in Suburban Maryland, 75 percent of it was located inside the Beltway in Prince George’s County.
The Interstate 270 Corridor of Montgomery County, Maryland is home to some of the foremost bio-medical tenants in the country. These firms find efficiency in locating near the U.S. National Institutes of Health and the U.S. Food and Drug Administration, among other federal agencies. Of the 2.7 million square feet of flex space dedicated to the research and development sub-sector in the county, only 4.8 percent was reported vacant at the end of the first quarter. Lack of supply in this market, for example, led Supernus Pharmaceuticals to sign a 119,000-square-foot, full-building lease in an office rehab project during the first quarter.
When the Baltimore industrial market is included with Washington, the total inventory was 402 million square feet and the overall vacancy rate was 7.4 percent, as of the first quarter. Baltimore provides industrial users in the Washington region with access to another international airport and to a seaport with the capacity to handle the larger, new Panamax class of cargo ships arriving from the expanded Panama Canal.
Going forward, we’ll learn whether the development pipeline of Loudoun County can satisfy the demand from Big Data and how long the market expansion will continue. Innovation and technology now play larger-than-ever roles in the development process, which will boost warehouse modernization efforts and provide landlords with opportunities to achieve maximum rent and deliver best-in-class space for industrial users. The Washington metro industrial market is expected to maintain strong fundamentals and continue to outperform the office and retail sectors for the foreseeable future.
— By Jessica Mistrik, Research Manager, Washington Metropolitan Region, Avison Young. This article was originally published in the June 2018 issue of Southeast Real Estate Business. Paul Adams, research analyst at Avison Young, contributed to this article.