Industrial gets sexy

Having a new, empty 130,000- square-foot industrial building might trouble some people, but not Craig Cope, vice president for Liberty Property Trust’s Virginia region. Not only is he confident that the Henrico County building will draw tenants, he says the firm is actively looking for new land and plans to build other speculative projects in the Richmond area. “There’s more risk with a spec building, but in the long run the return is better,” he says.

The $8.3 million building, finished in late January, is located in the Eastport Business Center, a 98-acre office/warehouse distribution park near Richmond International Airport. It’s the first spec building Liberty has done in the region since 2008. Cope says Liberty took the gamble after watching market demand rise for nearly three years. “We started to see … positive absorption in the market.” Demand picked up over the past year, he adds. “Fifteen months ago we weren’t quite sure we could get the demand” that he now thinks is there for new industrial space. “It just seems like we timed it right.”

The market for industrial space continues to improve in the Richmond region as well as in Virginia’s other major urban markets. The state’s mid-Atlantic locale is a big factor, with Richmond benefitting from its Port of Richmond facility while Hampton Roads picks up industrial clients due to its port as well. Yet other factors are at work statewide. For one thing, consumers are spending more, including more via e-commerce. Nationwide, e-commerce sales in last year’s fourth quarter were up almost 15 percent year-over-year to $79.6 billion, according to U.S. Census data. To keep up with that demand retailers have been seeking better distribution centers closer to customers.

In 2012, Amazon opened two 1 million-square-foot fulfillment centers in Chesterfield and Dinwiddie counties.

Plus, manufacturing continues to gain strength in Virginia: last year the state racked up nearly 9,800 announced manufacturing jobs, up from 6,400 in 2013, according to the Virginia Economic Development Partnership. As an industry, manufacturing leases a lot of industrial space.

With the uptick in demand, vacancy levels are dropping. For example, vacancy rates for industrial space in Northern Virginia are at 12 percent, the lowest level since the start of 2009, according to Cushman & Wakefield data.  In the Roanoke region, industrial-market vacancies dropped almost 2 percentage points to 9.3 percent in the fourth quarter of 2014. In Hampton Roads, the rate dropped to 7.4 percent at the end of 2014, down from 9 percent at the end of 2013.

These markets mirror the national trend. JLL, a major commercial real estate services firm, puts the U.S. vacancy rate for industrial properties at 6.9 percent, reflecting 19 quarters of positive absorption. Once considered one of the least sexy of the commercial real estate sectors, industrial is on a hot streak. U.S. properties attracted total investment of $54 billion in 2014, a 13 percent increase over the previous year, according to CBRE.

Part of the reason vacancy is dropping is the lack of new space. “Nothing has been built since 2007 so the supply side has been ticking down,” says Evan Magrill, executive vice president with Cushman & Wakefield|Thalhimer in Richmond. “So we’re seeing rates firming up and actually going up.”

The Richmond region, with nearly 80 million square feet of industrial space, had some big gains in the manufacturing and distribution market. Lumber Liquidators is building a 1 million-square-foot distribution center in Henrico, and Medline recently opened a 404,000-square-foot distribution center in Chester, south of Richmond.

As the economy improves, the region is getting some big projects because of its access to transportation and to the Port of Virginia in Hampton Roads. “Richmond and Hampton Roads are a lot more tied together with the port than given credit for,” says Lang Williams, a senior vice president with CBRE’s Norfolk office. Along with big new tenants, the region also is getting a massive paper factory on 850 acres in Chesterfield County. The $2 billion project, announced last year, is by China’s Shandong Tranlin Paper Co.

Williams says his Norfolk office team did more than 600,000 square feet of leasing in just the first two months of the year. “So the activity is definitely strong.” A deal announced last fall is an example of what could happen again during the next few years, he says. California-based Friant & Associates, an office furniture maker, is opening a 357,000-square-foot distribution center in Suffolk later this year. Friant’s products are made in China and imported through Oakland. Williams says growing companies often have to establish East Coast facilities. “Virginia is well-positioned to get some of that business,” he says.

Magrill says his firm sees existing tenants renewing their leases and sometimes expanding. Businesses related to the home industry started to bulk up last year, he says. In October Magrill helped close a deal on nearly 66,000 square feet leased by Horizon Forest Products, a hardwood flooring contractor. He also worked with a firm new to the Richmond region, Murray Supply Co., which leased 24,000 square feet in June in Henrico County’s Interport Business Center. “I don’t want to sound like it’s on fire, it’s not. But we are seeing expansion,” he says.

Signs are good in Northern Virginia as well where the warehouse/distribution sector is seeing the most activity. The biggest deals were Amazon’s preleasing of 300,000 square feet at Ashburn Crossing in Loudoun County, and Quest Diagnostics’ renewal of 248,000 square feet of flex space in Chantilly. Still, Northern Virginia isn’t expected to heat up too much this year due to a lack of space.  There are only a few blocks of space larger than 40,000 square feet, according to Cushman & Wakefield, and so far no speculative construction is planned for 2015.

Another trend in the industrial sector is that tenants are signing longer deals. About 18 months ago tenants wanted leases as short as a year, or maybe up to three years, Cope says. Nowadays tenants are signing deals for five years or even 10. “We’re not getting a lot of pushback on that. Now terms are better, rents are better and supply is down. There’s not a lot of good, functional space on the market,” he says.

Not surprisingly rates have been going up in many markets. In Richmond, total industrial rates are $3.31 per square foot, up 4.7 percent from a year ago. In Northern Virginia, rates finished last year at an average of $10.71 per square foot, up 4 percent from a year ago, according to Cushman & Wakefield data. In the Norfolk market, rents dropped in the fourth quarter to $4.64 per square foot, down from $4.90 a year earlier. CBRE research predicted rent increases in the first quarter of this year, though, driven by a decline in available space.

If that’s the case, others might follow Liberty and start building new space, especially if Liberty’s new building, dubbed Eastport VIII, fills up. The rental rate for the building is $5.25 per square foot, pricier than the rest of the market but not unexpected for new construction. Cope expects some new spec construction from other firms, too. “There’s enough there for a few developers to do this for a long time,” he says. “It’s a fun time to be in the business.”