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Richmond’s Industrial Market Fires on Most Cylinders, Save for Large Spec Projects

Greater Richmond’s industrial market is as strong as it has been in a generation. Given the overall growth of the economy, including industrial employment and investment, it appears that the engines driving industrial economic growth will remain steady and the need for industrial real estate will continue to be steady.

Greater Richmond’s industrial market is moving fast and on most cylinders, with the only laggard being pure speculative development of high-bay large block industrial and small incubation flex product. All other cylinders are pumping, including industrial and flex leasing, design build-to-suits, land sales, freestanding occupier building sales and investment sales.

Absorption and general growth activity is coming not only from local existing companies and start-ups, but also by companies outside of the area looking to relocate or open additional facilities here. The flavor of the demand has been relatively diverse reflecting the Greater Richmond area’s stable economy and Mid-Atlantic location with its superior logistic opportunities.

Economic Trends
Greater Richmond’s population is nearly 1.3 million people, and total employment is more than 650,000 in the Richmond metro area. The diverse economy includes 10 Fortune 1000 headquarters; pharmaceutical, chemical, biotech and other 21st century manufacturers; financial and information technology services; Fifth District Federal Reserve, Fourth Circuit U.S. Court of Appeals and the Virginia State Capitol.

The Greater Richmond area is ideally situated in the heart of the East Coast economic corridor, midway between Maine and Florida with more than 55 percent of the U.S. population within 750 miles. More than 1,000 motor freight companies and brokers serve the area supplemented by fast shipping access by both FedEx and UPS, which operate regional hubs in the area.

Industrial Projects
Overall, construction is coming back slowly, but more rapidly for larger projects. Year-to-date completions include more than 1.8 million square feet in five projects representing the spectrum of industrial style development:
• Eastport VIII is a 129,000-square-foot spec flex warehouse building developed by national REIT Liberty Property Trust;
• 404,000 square feet for Medline Industries in Chesterfield’s large Meadowville Park;
• 995,000 square feet for Lumber Liquidators in Henrico’s White Oak Tech Park;
• 250,000 square feet for Republic National in a new park in Hanover.
• And for good measure, a spec flex building spanning 23,000 square feet was delivered by local developer Hickman Properties.

David Williams, Colliers International | Richmond & Norfolk

David Williams, Colliers International | Richmond & Norfolk

Currently under construction is another 1.3 million square feet of manufacturing, distribution and flex space, involving such notable companies as Philip Morris and San Diego-based Stone Brewing Co.’s only other U.S. location. Most jurisdictions in the region are benefitting from these projects. The Greater Richmond Partnership and Virginia Gateway Region, Central Virginia’s two regional economic development groups, report even more imminent project announcements by companies out of the area looking to establish new projects or expand.

Typically, these projects are confidential to respect the prospect’s process so we can only track their progress using codes names designated by the EDAs. But when totaling the amount of square feet needed by prospects in advanced stages of interest, the region could easily see another 1.5 to 2.5 million square feet announced in the next 18 months, if most come to fruition.

Other Trends
Investment interest in the Greater Richmond industrial market is elevated and properties are trending on a variety of levels. On large, institutional-grade projects, some notable transactions were Baker Properties’ acquisition of the former First Potomac Realty Trust portfolio. This 827,920-square-foot portfolio sold for $60.3 million and signals Baker’s entry into the Richmond market. Also transferring were 502,395 square feet to Exeter Property Group in two buildings.

Another type of interest continues to impact the vacancy of buildings formerly of little value due to their functional obsolescence. Many older industrial properties are being redeveloped into multi-housing and mixed-use projects, thereby shrinking the industrial supply and pushing occupancy rates even higher.

On a smaller scale, local buyers are actively scooping up properties in the $1 to 2 million range, sometimes paying below 8 percent cap rates for fully leased properties and resorting to purchasing empty freestanding building in proven submarkets. The expectation of leasing them in a few months due to the shrinking supply brought on by increased absorption and a dearth of new spec construction is proving tempting to these investors. Often such investors are competing with companies hoping to buy property to occupy for their own operations and take advantage of occupier-style financing offered by the local banking community for interest rates less than 5 percent with favorable terms. By and large, rents continue to have the wind at their back.

— By David Williams, SIOR, CCIM, CEO and Managing Director, Colliers International | Richmond & Norfolk. This article originally appeared in the August 2015 issue of Southeast Real Estate Business.

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‣ Walker & Dunlop

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