DC Metro Area Industrial Market Overview 2020

Rentable Building Area/Inventory

  • Logistics: 153,321,228 SF
  • Specialized Industrial: 28,657,987 SF
  • Flex: 77,401,676 SF
  • Market: 259,380,891 SF

The big story and overarching theme in the industrial market both nationwide and in the DC metro area is Amazon. The tech giant has disrupted both the retail and industrial real estate sectors unlike anything before. E-commerce, which is expected to grow by 10% in 2020, has forever changed retail, specifically in the way product companies manage their real estate needs. Businesses are reducing their retail footprint and storing product off-site in industrial facilities with rental rates and triple net expenses many times lower than their retail counterparts. Products can now shipped or delivered at minimal cost. Retail landlords are struggling to adapt to this new environment but, in short, retail’s loss is industrial’s gain. “Last-mile delivery” is driving the DC metro logistics market, which comprises nearly 60% of total inventory. While national distributors prefer metro areas with cheaper land and less traffic congestion, the region’s buying power, population density, and access to both national and international airports (DCA and IAD respectively) more than compensate and, as a result, the demand and value for industrial space will continue to increase.

The Amazon effect is not limited to logistics. Along with other tech behemoths, Google and Microsoft, the need for data storage is fueling another sector of the industrial market: data centers. Amazon may have chosen National Landing as the site for its HQ2, but its subsidiary Amazon Web Services has quietly made Herndon, VA its unofficial east coast headquarters; occupying over 1,000,000 SF in the submarket. This is due to its proximity to Loudoun County, home to Data Center Alley and over 70% of the world’s internet traffic. Microsoft recently purchased 332 acres in Leesburg and Google purchased two sites for a combined 148 acres for data center development. In addition, just last week, Amazon purchased 100 acres in Chantilly for $73,000,000 with sources indicating the site will be used for data centers. With data increasing exponentially and more companies and individuals moving to the cloud, the need for data storage will continue to increase for the foreseeable future; resulting in rising values for both existing product and industrial-zoned land.

*Due to diminishing supply, land in Loudoun County can exceed $1,000,000 per acre.

Vacancy Rate

  • Logistics: 5.3%
  • Specialized Industrial: 6.7%
  • Flex: 7.6%
  • Market: 6.2%
  • Net Absorption Past 12 Months: 1,900,000 SF
  • Vacancy Change Past 12 Months: 0.1%

There was a slight increase in the metro vacancy rate over the past 12 months and while a 0.1% increase is hardly noteworthy by objective measures, it does provide insight into the overall strength of the industrial sector. Large tenant move-outs due to bankruptcy filings were a major contributor to the vacancy increase with HH Gregg and Toys R Us vacating nearly 400,000 SF at 14301 Mattawoman Dr in Brandywine, MD and 670,000 SF at 7106 Geoffrey Way in Frederick, MD respectively. This combined 1,070,000 SF accounts for approximately 0.4% of the market’s total inventory. The real story is in the 1,900,000 SF of net absorption over the past year due to a booming logistics industry and demand for data center space. The overwhelming majority of demand is focused in Northern Virginia with its 5 largest industrial submarkets accounting for 99.8% of total absorption (1,897,000 SF) over the past 12 months despite comprising only 32% of the DMV’s total inventory. Route 28 North, alone, contributed 1,100,000 SF to that number; evidence of the strong and growing demand for data center space.

*Loudoun County offers incentives for data centers including sales tax exemptions for equipment such as servers, generators, and chillers.

Average Asking Rent

  • Logistics: $10.62/SF
  • Specialized Industrial: $10.63/SF
  • Flex: $14.68/SF
  • Market: $11.83/SF
  • Rent Growth Past 12 Months: 3.3%

Industrial rents in the DC metro area began to recover from the effects of the Great Recession in 2012 and, since then, have outpaced all other asset classes in terms of rent growth. This can be attributed to the rise of e-commerce, due largely in part to Amazon’s disruption of the retail industry, and cloud computing and the need for data storage. As the law of supply and demand would indicate, the increase in demand led to significant vacancy compression over that time; 44.14% to be exact. This number is even more astounding when considering that over 17,250,000 SF delivered over the same period. New product cannot be built quickly enough and the discrepancy between supply and demand will continue to push rents up. This is further exacerbated by the price of industrial land, particularly in Loudoun County, along with rising labor and construction costs.

Under Construction

  • Logistics: 777,030 SF
  • Specialized Industrial: 1,375,177 SF
  • Flex: 445,170 SF
  • Market: 2,597,377 SF
  • Deliveries Past 12 Months: 3,100,000 SF

In stark contrast to the DC metro office market, demand for industrial space exceeds the existing supply. This is amazing when considering that 3,100,000 SF delivered in the past 12 months and nearly 2,600,000 SF is under construction and scheduled to deliver in 2020. Again, Northern Virginia led the way; delivering 8 of the largest properties in the metro area in 2019. Development is largely driven by tech companies’ insatiable appetite for data and the need to store it. From sensitive information like health and/or financial records to iPhone photos, more and more data is being created and stored in the cloud, and while “the cloud” may sound ethereal it’s actually a collection of brick and mortar buildings: data centers. Companies like Google, Amazon Web Services, and Microsoft have been competing to secure land/assets to support their data warehousing needs and, in doing so, have driven up prices (predominantly in Loudoun County). Affordability will thus be a growing impediment to future development; however, it’s likely that demand will continue to outpace supply leading to further rent growth which should justify the investment. The remainder of development was primarily in Prince George’s County along the east side of I-95 and, while only 104,973 SF delivered in 2019, there is currently over 400,000 SF under construction with an additional 650,000 SF proposed. Due to its proximity to Amazon’s HQ2 in National Landing, Prince George’s County is strategically positioned to become the Data Center Alley of Southern Maryland.

The exact opposite is happening in the District. The majority of DC’s industrial product is in Northeast and Southeast/Southwest, historically depressed and high-crime areas; however, as evidenced by high-profile developments like the Wharf and Navy Yard, these areas are undergoing gentrification and slated for redevelopment. As a result, the highest and best use for existing industrial properties is multi-family (mixed-use) projects; a trend that should continue to benefit Prince George’s County.

Sales Past 12 Months

  • Sales Volume: $2,700,000,000
  • Market Cap Rate: 7.0%
  • Average Price/SF: $224
  • Average Vacancy at Sale: 8.1%

Nearly all capital investment in 2019 was in Northern Virginia and to a lesser extent, Prince George’s County. In addition to Google’s, Amazon’s, and Microsoft’s recent acquisitions, Digital Realty purchased more than 400 acres in Loudoun County for $236,500,000 with the potential to develop over 2,000,000 SF of data center space. Other notable sales include Amazon’s acquisition of 13600 EDS Dr in Herndon for $54,000,000, which includes a 434,000 SF data center; DWS Group’s purchase of the 350,000 SF Chantilly Distribution Center located 3900 Stonecroft Blvd for $56,100,000; Blackstone’s purchase of a 7-property portfolio of shell industrial buildings that it converted into data centers; NGP Management’s $142,000,000, 9-property portfolio purchase in Lorton, VA; and Buchanan Partner’s acquisition of 39 properties across the DC metro area totaling nearly $200,000,000. At $2.7 billion, 2019 sales set a record and surpassed the previous year’s total by nearly 60%. With Amazon’s growing influence on both the logistics and data center industries, not to mention the impact it will have on employment and population growth in the DMV, the industrial sector should continue to thrive and remain the most desirable and valuable asset class in commercial real estate for the foreseeable future.

Leave a Reply