By Bryan Herr and Oliver Fryer, MacKenzie Commercial Real Estate Services
This article first appeared in the November issue of Southeast Real Estate Business
The industrial real estate market continues to sustain throughout the country with national vacancy rates steadily creeping towards 7 percent (6.8 percent at time of writing). Over the last three years, the industrial real estate market continued to set records and became known as the darling asset class within the commercial real estate community. However, the market is showing signs of reversion to historical velocity and vacancy rates.
The industrial vacancy rate is steadily climbing in the DC Metro as demand softens for third party logistics in Q4 of 2024. Vacancies are up to 6.5 percent after reaching an all-time low of 3.8 percent at the end of 2022. The market remains tight by historical measures however, normalized leasing velocity, a few large tenant moveouts, and reduced demandis expected toprovide upward pressure on the vacancy rate in 2025.
Subleasing activity trended upward in the last 6-12 months to over 1.3M square feet of space.聽 A few examples of large sublets include: XPO Logistics, who put 393,000 square feet on the market at Capital Gateway in Brandywine, Builders First Source moved out of 135,000聽square feet at Plaza 500 in Alexandria, and in Q2 of 2024, Western Express moved out of 102,000 square feet that they moved into approximately two years ago. The theme could be labeled as a mean reversion as consumers and businesses return to 鈥榡ust-in-time鈥� models and away from the pandemic-inspired 鈥榡ust-in-case鈥� model.
Development is still taking place although at a much slower pace compared to18 months ago. More than 6 million square feet of space delivered in 2022 and 2023, making for the largest two-year inventory expansion on record.聽Of note, the majority of new buildout is for larger modern logistics facilities to meet the changing needs of businesses. Northern Virginia also boastssevenmillion square feet of new (with more planned 5 or more years down the line) data center developments underway.
Data centerdevelopment has thematically reduced new supply potential for new Class A traditional warehouse space in Northern Virginia. New Class A development asking rates in Northern Virginia are currently at or above $20 per square foot on a triple-net basis. Regionally, trailer storage or expanded 鈥渋ndustrial outdoor storage鈥� has also been a theme – highlighted through the pandemic as a valuable asset and now softening post-pandemic, both locally and nationally due to reduced demands for expanded 鈥榡ust-in-case鈥� outdoor storage requirements.
National Capitol Business Park (Turnbridge Equities and Manekin LLC) is going through a two-phase construction plan of over 3 million square feet in Upper Marlboro, Maryland to meet the demands proximal to the DC Metro and southern portion of the Baltimore-Washington corridor.In Phase I, they have approximately 1.4 million square feet completed and are under construction of 827,000 square feet with 562,000 square feet having already been leased. ARCOis slated to begin construction on the remaining nearly 500,000 square feet in November and will start Phase II in Q1/Q2 of 2027 which will generate an additional 1.5 million square feet of modern Class A Logistics facilities. The buildings in Phase I are 36鈥�-40鈥� clear, and include employee parking to accommodate double per local codes, and trailer drops equal to or greater than dock positions.
Development in the region has been limited due to zoning/land constraints, increased land and construction costs, and municipal processes which increase the timelines, risks and, ultimately, costs for buildout.Class A buildings bring an aura and an image that is tough to replicate in older buildings and businessesprefer the image for their customers, their employees, and their brand. New buildings offerenhanced functionality and efficiency for business operations through energy efficiency, cubic storage volume, truck maneuverability, and ample employee parking.
77% of the industrial buildings under 50,000 square feet in the immediate Washington DC Metro area including parts of Northern Virginia and Prince George鈥檚 County werebuilt before 1995 and are characterized as less functional with lower clear heights (</= 16鈥�-18鈥�), smaller truck courts designed for box trucks rather than tractor-trailers, and heavieroffice build-outsand/or mezzanine-style space. The vacancy rate in smaller buildings (sub 50,000 square feet) is still at ~3.8% showing the depth of tenant pool. Rent growth has also continued to trend upwards in this segment to over $16+/square footin many cases around the DC Beltway.
Overall, aside from select pockets (such as the Dulles-Corridor), the sentiment is that industrial assets are holding strong however with more sublet space coming available and vacancy rates creeping up, and more options exist for tenants performing a renewal or new location search. Typically, more options mean more competition to win tenant business. We will not be in a tenant鈥檚 market from a technical perspective until we see the vacancy rate approaching 10 percent, however tenants and landlords alike are taking note.
