E-Commerce Driving More Demand For D.C.-Area Industrial Than Developers Can Build
E-commerce companies are looking to open warehouses around the D.C. area faster than developers can build them, driving up rents in the industrial market and making new types of projects feasible.
The D.C. area has historically not been a major industrial market, with no substantial manufacturing industry, and distributors were able to deliver to D.C. from other parts of the region. But the shortening of delivery times is pushing e-commerce companies like Amazon closer to the nation's capital.
"The e-commerce story in Washington is a fairly new story," JLL Senior Managing Director John Dettleff said. "You were able to get to Washington from Baltimore, Richmond or Central Pennsylvania ... now everybody in the market says 'I've got to be able to deliver same-day or next-day, and I can't do that 100 miles away. I've got to have some kind of presence proximate to the Beltway.'"
The increasing demand for D.C.-area warehouse space has led major developers to enter the market that have not previously built industrial space, such as Peterson Cos.
Peterson has acquired or placed under contract multiple properties on I-95, from Prince George's County to Stafford County, and is planning to move forward with new industrial projects in the coming months, Peterson President of Development Taylor Chess told Bisnow. He declined to share specific details on the projects.
"What you are seeing now is a flood of tenants coming to the market and looking for these opportunities," Chess said. "Warehouse has historically been relatively small in the D.C. market ... there's no question that this year e-commerce has skyrocketed, and it's gotten the focus of a lot of people."
The surging demand for industrial space around the Beltway has outpaced the amount of supply on the market, and there is a limited stock of vacant land available to build new warehouses. But the tightening industrial market is beginning to increase rents to a point where developers can afford to tear down old properties to build new warehouses.
This is the case in Springfield, where crowdfunding investor Fundrise in April paid $15.7M for a 7.7-acre property near the interchange of I-395 and the Beltway. Fundrise plans to demolish the two aging industrial buildings on the property and develop a 138K SF distribution center on spec, with JLL managing the project's leasing, Dettleff said.
"That's an example of the valuation in the market reaching a point where you can buy two buildings, rip them down and build something better," Dettleff said. "I think we'll start to see more of that as the market tightens."
Fundrise's Springfield site is less than a mile from the Amazon-leased warehouse that sold to Black Creek Group in July for $277K/SF, a record price for the market. Amazon's growth has continued to drive the region's industrial market, with the e-commerce giant last month announcing plans for seven last-mile warehouses totaling 1M SF in Maryland, including two in Prince George's County.
"They are probably the most active tenant in our market and have been taking more space," Transwestern Managing Director Mark Glagola, who brokered the July sale, said of Amazon. "Amazon has always been very aggressive, but I think you'll see more people follow."
The D.C. Metro area industrial market experienced 818K SF of positive net absorption in the first half of this year, according to JLL, its seventh straight quarter of occupancy gains.
The combined Baltimore-Washington industrial market experienced 7.1% year-over-year rent growth, according to Transwestern, the third-highest increase among the major U.S. industrial markets.
"We're at a tipping point right now where we're starting to see things like office and retail being torn down and industrial being created," Glagola said. "I think more of that will happen, because I believe rents will keep going up, and the cost to tear things down and build back up before was too restrictive."
The lack of large industrial development sites on the Beltway is leading developers to look further away from the major highway, Chesapeake Real Estate Group partner Matt Laraway said.
"It's a land-constrained market, and there's a lot of population, so everybody has wanted to be there, and you're seeing developers now stretching further from the Beltway than they had in years past," Laraway said.
Chesapeake has previously built industrial projects in the D.C. area, and it is now working on two developments in Maryland's Anne Arundel and Harford counties.
Because of the lack of available land on the Beltway, Manekin is planning a 3M SF industrial park on a 450-acre site near Collington Center in Prince George's County, roughly 6 miles outside the Beltway.
"The only way to produce new product close to the Beltway is to tear down existing buildings and start over, so we think we have a good opportunity out at Collington," Manekin Chief Operating Officer Cole Schnorf said. "It's targeting all the users looking around the Beltway that can't find anything."
In addition to a scarcity of well-located land in the D.C. suburbs, industrial developers looking to build new projects also face challenges in earning community approval.
Amazon backed out of plans to build a 4M SF industrial facility at the Westphalia development in Prince George's County last year following opposition from neighboring residents. This year, the e-commerce giant is facing pushback from Montgomery County officials over a plan to build a 200K SF industrial facility in Gaithersburg.
"Montgomery County really doesn't want warehouses, and within Prince George's County, there are areas like Westphalia that are a challenge," Schnorf said. "Not only do you have to find a place you can go, but you've got to get jurisdictional buy-in as well."
As Peterson Cos. moves through the planning process for its industrial projects, Chess said it is working to get local officials on board with the idea of adding warehouses to their community.
"What's really interesting now is educating jurisdictions on what last-mile and this warehouse use is," Chess said. "Jurisdictions never wanted to have their industrial near major population centers. Industrial was always in the hinterlands, but now what these e-commerce tenants want is to be at the major intersections."
If it weren't for the scarcity of land and the difficult approval process, Glagola said the D.C. industrial market would be growing much faster.
"There is an incredible desire to build, the actual action of it is extremely difficult," Glagola said. "There is little to no greenfield space, you have to get rid of something in order to build something, and the entitlement process has never been easy ... We would build tenfold what we're building if we could."