D.C. Is Getting Left Out Of The Last-Mile Industrial Boom
The growth of the online delivery market has created a last-mile industrial boom across the country, but the nation's capital has struggled to build new warehouse space near its urban core and is seeing stagnating demand.
E-commerce companies and retailers desire distribution centers close to population centers to shorten delivery times, but land prices in D.C. have made that difficult.
Land prices inside of the Baltimore and Washington beltways, the areas roughly considered last mile, averaged $465K per acre between 2013 and 2017, according to Transwestern, a 93% increase from the prior four years.
This has limited industrial development in these areas. Just 8% of the 4.1M SF of flex-industrial development in the pipeline in the Baltimore-Washingon region as of December was in last-mile areas, according to Transwestern.
"The ability to deliver new product is severely restricted," said Transwestern Senior Managing Director Mark Glagola, who specializes in industrial property. "We don’t have a lot of land, and what we do have is very expensive. To tear down and build new doesn’t necessarily make economic sense."
Glagola also attributed the difficulty of new industrial development to local governments, saying zoning regulations can be overly restrictive for warehouse construction.
Industrial development in the D.C. Metro area has been on the rise since 2012, according to Marcus & Millichap, but the research firm projects a significant drop this year. Based on ongoing projects, it expects 1.4M SF of industrial space to deliver in 2018, a 75% decline from last year.
The problem has been exacerbated by the demolition of the existing warehouse stock in densely populated areas. Roughly 20.1M SF of industrial space was demolished in the D.C.-Baltimore region between 2005 and 2017, with another 4.6M SF planned to be demolished by 2020, according to Transwestern. Nearly 70% of demolished warehouse space was in last-mile areas.
Demolished warehouse space has largely been replaced by mid-rise and high-rise multifamily, a booming property sector in the D.C. region in recent years. Multifamily developers are also able to beat out industrial companies for vacant sites.
"If it's a greenfield development, typically our multifamily friends would outbid us because they can go vertical and overpay," Glagola said.
There have been some examples of new industrial development, but it tends to be several miles from the densest population centers.
MRP Industrial recently broke ground on the Mercure Logistics Center, a 100K SF speculative industrial project in Sterling, about 30 miles from D.C. The developer is building it on behalf of the property's owner, Industrial Property Trust.
The last time MRP Industrial built on spec in the D.C. area proved successful. The developer last month signed La-Z-Boy for a 221K SF lease at a facility it built in Bowie, Maryland, an outside-the-Beltway submarket about 12 miles from D.C.
The developer is actively pursuing more sites in Prince George's County and Virginia's Route 28 corridor, MRP Industrial Senior Vice President Lisa Goodwin said. As multifamily and other sectors push industrial out of the urban core, Goodwin sees more opportunity in the suburbs.
"We’re not focused on D.C. proper, I think land values don’t justify it," she said. "What people would want for land doesn’t justify the rents you would get, so we don’t see the economic fundamentals working because there is a higher and better use for the land."
Transwestern Development Co. is also working on a large spec industrial project in the D.C. suburbs. Last month its industrial arm, Ridge, in partnership with Principal Real Estate Investors, acquired the 11-acre Springfield site formerly home to the printing facility for Army Times. The JV plans to build a 190K SF distribution facility.
With tight market conditions, Glagola said he expects industrial rents will soon reach a high enough level in D.C. and the close-in suburbs to allow new industrial projects to pencil. Tranwestern predicts Northern Virginia last-mile rents will rise 4.4% through 2019, with D.C. rents rising 2.7% and suburban Maryland rents rising 2.2%.
Despite solid fundamentals, such as area median income and population growth, that typically drive the need for distribution centers, D.C.-area demand appears to be stagnating. Goodwin said 2015 and 2016 were strong, but that growth leveled off last year. Glagola had a more bleak view, saying the D.C.-area is not experiencing the same type of industrial boom as other markets.
“We’re seeing it in New Jersey, Oakland, Dallas, Miami, every other major market except for here," Glagola said. "It’s the damnedest thing. We’re seeing industrial demand like crazy in every other major urban market but not here.”