Location, location, location

Virginia isn’t just for lovers or political scandals — it’s also for distribution centers.

In the past few years, the state has seen a plethora of companies locating distribution centers and warehouses here, including Amazon, Medline and Philip Morris USA in Chesterfield County, Lumber Liquidators in Henrico County, The Vitamin Shoppe in Hanover County and outdoor gear retailer Backcountry.com in Montgomery County.

The industrial real estate market is particularly hot statewide because Internet retailers are attracted by Virginia’s central location on the East Coast and its proximity to the key transportation arteries of interstates 81 and 95, not to mention the Port of Virginia in Norfolk and its intermodal center in Front Royal.

“As online shopping and online sales increase, there’s less of a need for bricks-and-mortar locations and more of a need for distribution and logistics locations. It’s all about speed for the customer. It’s all about building distribution networks where people can be reached quickly with their products,” says Matthew Huff, an associate broker with Roanoke-based Poe & Cronk Real Estate Group. 
Poe & Cronk assisted Backcountry.com in opening a distribution center in Montgomery County’s Falling Branch Corporate Park in 2012.

About 70 percent of Backcountry.com’s customers are on the East Coast, says Brian Hamilton, Montgomery County’s economic development director. That drove its decision to locate in Virginia, just off Interstate 81. “Our site is an eight-hour drive to New York and in eight hours you can also get to Atlanta,” Hamilton says.

Backcountry.com invested $20 million and built a 315,000-square-foot East Coast fulfillment center, creating 200 jobs in the New River Valley area.

That’s a typical scenario for a larger distribution center.

In Hanover County, The Vitamin Shoppe built a 300,000-square-foot, $39.4 million distribution center last year alongside Interstate 95 in Ashland. Republic National Distributing Co., the second-largest wine and spirits wholesaler in the U.S., is building a 260,000-sqare-foot, $17 million distribution center next door.

According to Edwin Gaskin, Hanover’s economic development director, distribution centers “represent a healthy percentage” of the county’s current economic development prospects, and every company is interested in new construction. “They want to design their facility for maximum efficiency,” he says. “If your staff has to take 20 more steps to do the same task because of poor design, that’s not efficient.”

Distribution centers require a big footprint and possess unique architectural needs, says Lang Williams, a senior vice president in the Norfolk office of CBRE, which assisted with The Vitamin Shoppe deal. High ceilings, for instance, are required to stack inventory, and companies need powerful fire suppression systems.

“There is very little, if any, quality available space with the design features that these users need,” Williams says. Because of the specialized equipment designed to handle each company’s product distribution, “you pretty much have to build it new,” he says. “In The Vitamin Shoppe’s case, the material-handling system they have is almost as expensive to design and install and invest in as the building itself.”

Distribution and logistics centers also require large areas for loading trucks as well as plenty of parking. Distribution centers, like the one Amazon opened in Chesterfield, also tend to require a lot of manual labor. An e-commerce business “may have 2,000 employees at a large distribution center,” Williams says. “That’s a lot more land you also need to support parking.”

The area of the state that has probably benefited the most from the influx of distribution centers is the metro Richmond area. Their massive size and economic impact was heralded by the arrival of Amazon, which in 2012 opened a 1-million-square-foot, $85 million fulfillment center at Chesterfield County’s Meadowville Technology Park off Interstate 295.

The company employs about 1,100 workers at the facility and hires an additional 2,000 workers seasonally. Amazon simultaneously opened another 1 million-square-foot, $50 million fulfilment center in Dinwiddie County.

“When Amazon entered Richmond … that really established Richmond all of a sudden on [other distribution companies’] radar,” says Williams. “They look at the sophisticated supply team of an Amazon and they think, ‘Gosh, they must know something.’ … That seemed to make Richmond a popular place to be.”

The vacancy rate for industrial properties in Richmond reached 7.3 percent in the second quarter of this year, a five-year low, according to CBRE Global Research and Consulting. The average rental rate in the market was $4.07 per square foot.  The Richmond market had just over 1 million square feet of existing stock available for lease. 

Other major projects under construction in the Richmond area include one for Lumber Liquidators. The retail flooring company is opening a new, 1-million-square-foot distribution center this fall in Henrico’s White Oak Technology Park. “They’re a very fast-growing company with a number of retail stores, and their growth has demanded that they have their own distribution facility,” says Gary McLaren, executive director of the Henrico Economic Development Authority.

In Chesterfield County, Chicago-based Medline, a medical supply company, built a 404,000-square-foot, $20 million distribution center in the county’s Meadowville Technology Park this year. In the same industrial park, Philip Morris USA is spending $50 million on a complex of four tobacco-storage warehouses totaling 1 million square feet, which will open next year.

“With our success with Amazon, Medline and others, we are experiencing an increase in direct inquiries from interested firms,” says Will Davis, Chesterfield’s economic development director. The infrastructure required by the large industrial fulfillment centers is not only attracting other logistics centers but also call centers, back-office finance centers and associated third-party logistics firms, Davis says.

Because of that explosion of interest, real estate investment trusts are starting to build distribution center space on spec for the first time in several years, says Matt Braun, senior associate with Cushman & Wakefield|Thalhimer Commercial Real Estate in Richmond.

Pennsylvania-based Liberty Property Trust is building a 129,000-square-foot space in Henrico County near Richmond International Airport. Brandywine Realty Trust, also based in Pennsylvania, is building three industrial warehouses with higher ceilings and large bays in that area as well.

Says Braun: “We’ve seen more people looking at big tracts in the last 12 months than in probably the last six years combined.”