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Industrial Developers Accelerating Spec Construction As E-Commerce Demand Spikes

Industrial real estate has been a rare bright spot during the pandemic, with e-commerce companies expanding to handle more online delivery orders, and industrial developers are looking to build more space to meet that demand. 

The Tradepoint Atlantic industrial development in Baltimore.

Four major industrial developers and owners, speaking Wednesday on Bisnow's Baltimore-Washington Industrial & Logistics webinar, said they are eagerly moving ahead with new industrial developments in the region, some of them on a speculative basis.

While they see strong demand for these projects, there have been some challenges around bringing tenants in for tours and getting projects financed during the coronavirus crisis. 

Tradepoint Atlantic Managing Director Kerry Doyle, who oversees real estate and development for the 3,300-acre Baltimore site, said it has been speeding up development plans during the pandemic. The developer has completed pad site preparations for 4M SF of industrial space and is preparing to break ground on a 400K SF spec building. 

"This has been the busiest four months we've had," Doyle said. "It's not just in response to COVID, but I think COVID has accelerated our plans."

Doyle said this acceleration has happened because there is more demand from e-commerce companies for distribution facilities. Amazon in April signed on to for a new 1M SF fulfillment center at Tradepoint Atlantic. In June, Amazon announced plans to open seven new last-mile warehouses in Maryland totaling more than 1M SF.

Manekin Chief Operating Officer Cole Schnorf, whose firm is building multiple industrial projects in Maryland, said Amazon has been scouring the market for new space as it looks to get ahead of its future distribution needs. He said the lack of available industrial space close to population centers has given the e-commerce giant a sense of urgency when looking for deals.

"If you announce plans to build a building and it's near the Beltway, there's a big chance Amazon's going to come and take a look at that building, if not actually lease it," Schnorf said. "They're tying up space because they figure the need is going to grow and the opportunity for space may not be there in a year or two if it's there now."

Clockwise from top left: Bisnow's Liz Baker, Tradepoint Atlantic's Kerry Doyle, Manekin's Cole Schnorf, Nuveen's Louis Bauer and MRP Industrial's Reid Townsend.

The urgent demand for close-in distribution locations has allowed developers of those industrial buildings to drive up the rents, Schnorf said, further incentivizing them to accelerate their project timelines.

"People like Amazon are willing to pay the higher number to be able to make that quick delivery to be a 30-minute drive to D.C. instead of 60 minutes or a two-hour drive, they'll pay double-digit [per-SF] rents as opposed to $5 or $6 rents," Schnorf said.

Schnorf said local governments also have a sense of urgency to move forward with industrial projects and are speeding up their entitlement and permitting processes. Manekin recently rezoned a 450-acre site in Prince George's County, and he said the process took 11 weeks, whereas it previously may have taken nearly a year.

"The county recognized the need for tax revenue, so they really accepted the case that more revenue would be generated by an industrial park than a residential subdivision," Schnorf said. "They recognized the need for jobs, so they heard that argument and moved quickly to get the rezoning through." 

MRP Industrial founding principal Reid Townsend said his company is developing projects in New Jersey, Pennsylvania and Maryland. He also said the pandemic has accelerated industrial activity as more people have used online delivery services.

"Part of what's driving industrial staying as active as it has been during the pandemic is our tenant profiles," Townsend said. "The cultural shift in pressures are all shifting toward what our business is. It's distribution of consumer goods, and it's often bypassing the retail locations that are unavailable."

KSS Architects principal Ed Klimek, MRP Industrial co-founder Reid Townsend, Duke Realty Vice President of Leasing and Development Scott Henderson and Bohler Engineering partner Mike Jeitner

While demand has remained strong, the pandemic has created some logistical challenges in bringing in prospective tenants to tour properties, and the economic crisis has led some capital sources to pull back on financing new projects.

Some tenants were still willing to come tour properties while wearing masks, Townsend said, and he said MRP Industrial continued to hold tours at a 175K SF spec project it delivered in Maryland just as the pandemic began. He said it signed two leases to fill up the building, and it achieved the same rents it would have gotten before the coronavirus. 

But for another project in Central New Jersey, Townsend said a prospective tenant from California didn't want to make the trip to tour the property. That didn't stop it from moving forward, though, and he said it expects to sign a lease this Friday with the tenant having never seen the property in person.

"They've been unable to travel, we've done everything virtually," Townsend said. "We're going to design all of their tenant improvements virtually. I'm not sure how they're going to do their hiring and who's going to manage the facility, but they'll be under lease and we'll have it operational for them later this year."

During the early months of the crisis, economic uncertainty led to a widespread slowdown in financing that affected the ability of industrial developers to secure capital, despite the continued demand for their projects.

Nuveen Senior Director of Industrial Acquisitions Louis Bauer said many banks went to the sidelines in the spring as borrowers were drawing down lines of credit and they had to manage distressed situations.

"The financing portion of our market is something that locked up in March and April and into May," Bauer said. "I think we're starting to see that freeze thaw, and we're starting to see more and more lenders come back into the space."

As Tradepoint Atlantic has sought capital for its 400K SF spec project, Doyle said he has found that available financing deals are still not as attractive as they were before the crisis.

"Leverage levels still aren't there yet, the rates and spreads have climbed a little bit," Doyle said. "You're starting to see that loosen up a bit, but it's still not back to pre-COVID levels."

Contact Jon Banister at jon.banister@bisnow.com.