Virginia logistics space squeezed by data center boom

After the COVID-19 pandemic struck, Virginia experienced a surge in demand for warehousing and distribution space driven by consumers shifting to the convenience of online shopping.

In 2022, at the height of this boom, developers responded by rapidly adding new supply, with Richmond and Hampton Roads seeing dramatic increases in development of industrial spaces like warehouses and distribution centers. But by 2023 and into 2024, demand for distribution space began to taper as consumers became more cautious with their spending and markets cooled down.

Nevertheless, vacancy rates for logistics sites are unlikely to spike anytime soon in Virginia, as it remains a challenge in many parts of the state to find suitable land for them. And where there is suitable land, logistics companies are increasingly finding themselves in competition with another fast-growing industry — data centers.

Leasing remains strong for industrial spaces, says Lang Williams, an executive vice president at Colliers, but there will likely be a slowdown of spec warehouse construction because much of the available land has already been absorbed in recent years.

Ben Luke, a vice president in Colliers International’s Northern Virginia office, says that in the greater Washington, D.C., area, data centers are absorbing many of the parcels that would have otherwise hosted distribution facilities. As a result, construction of distribution and fulfillment facilities has slowed in recent years due to the scarcity of developable sites.

There are rising land costs to consider, much of which is driven by competition with data centers. (Northern Virginia is home to more than 250 data centers, many of which are located in Loudoun County’s Ashburn area, which has the world’s largest concentration of data centers.)

It’s not that there isn’t still demand for logistics centers, Luke clarifies, but developers and localities are likely to get more bang for their bucks with data centers. For instance, data centers generate 38% of Loudoun County’s general fund revenue.

Bo McKown, senior vice president for Cushman & Wakefield | Thalhimer’s Capital Markets Group, notes that Richmond has one of the strongest markets on the East Coast for industrial buildings like warehouses and distribution centers, with his firm reporting a vacancy rate of 3.7% for industrial buildings in metro Richmond area at the end of 2024.

And that’s reflecting the same trend with data centers competing for space with logistics operations.

As Northern Virginia’s data center market has become more expensive and built out, the industry is trickling down to the Richmond area, where, McKown says, data centers are also gobbling up land that previously would have been used for distribution and logistics. The shift has not only reduced available land in the region for traditional industrial uses but has also attracted ancillary businesses supporting data centers — such as HVAC and piping contractors — making the market even more attractive to data center developers.

Cushman & Wakefield | Thalhimer reported earlier this year that Richmond’s industrial inventory has expanded by 20.7% since 2020, with 20.2 million square feet delivered in that time, including 3.8 million square feet for data centers.

From Richmond to the beach

Geoff Poston, a senior vice president and managing broker with Cushman & Wakefield | Thalhimer, describes Richmond as a “national darling” in the distribution space, noting that the presence of various major highways like Interstate 64, I-85 and I-95 make the region attractive from a logistical standpoint.

Based on active projects and planned construction starts, Cushman & Wakefield | Thalhimer reports that 4.5 million square feet of speculative industrial space is anticipated to be delivered in Richmond before the end of 2026, with just over 1 million square feet scheduled to be delivered this year.

Some notable current and planned logistics projects under development in the Richmond region include the 582,437-square-foot I-895 Logistics Center at 7001 S Laburnum Ave. being developed by Ashley Capital; PNK Group’s 846,260-square-foot speculative development at 1653 Ashton Park Drive; and the Lego Group’s $366 million, 2 million-square-foot Prince George County warehouse and distribution center slated to open in 2027.

McKown says the Richmond market has avoided overbuilding that has plagued markets like Charlotte, North Carolina, and Savannah, Georgia, where vacancy rates have recently exceeded 10% due to excessive post-COVID development. Land constraints, difficulty in obtaining government approvals and wetland issues in Richmond have kept spec construction in check, he says. As a result, Richmond’s existing industrial properties have benefited from the constrained supply and are expected to continue doing so, with Thalhimer forecasting industrial vacancy rates in the region will likely remain stable or even dip over the next year.

Hampton Roads had a similarly low industrial vacancy rate of 4.4% percent in 2024, with much of the region benefiting directly from logistics activity tied to the Port of Virginia.

However, McKown said, development in Hampton Roads is more geographically challenging than in Richmond due to the difficult soils and proximity to water. Furthermore, Poston added, industrial land in Hampton Roads has often been rezoned or redeveloped for multifamily or retail use over the years, substantially reducing the number of suitable parcels for distribution centers.

“I think the challenge in Richmond and Hampton Roads has been that we’re running out of viable land sites to build,” says Liz Greving, an associate director of research for Cushman & Wakefield | Thalhimer. “So, the pipeline is shrinking a little bit because of that, but there’s still a decent number of projects coming.”

More than 6.4 million square feet of industrial space is scheduled to be delivered in Hampton Roads this year, according to Thalhimer. And much of it will be devoted to logistics projects.

Earlier this year, Kansas City, Missouri-based NorthPoint Development wrapped up construction on the two-building, 840,000-square-foot Phenix Commerce Center in Hampton. In May, it was announced that e-commerce fulfillment, warehousing and logistics provider Cirro Global would be the first tenant to move into the site. And Amazon.com plans to open a 3.2 million-square-foot robotics fulfillment center in Virginia Beach later this year, following a 200,000-plus square-foot delivery station the e-commerce behemoth opened in the city last year.

Shenandoah constraints

Newmark’s executive managing director, Grant Bates, says that west of Richmond, potential users have struggled for years to build new logistics or distribution centers due to various obstacles and barriers to entry.

The Shenandoah Valley is a challenging location for distribution centers due to its rocky terrain and topography. The cost of moving dirt and grading land is often cost-prohibitive, and vacant land parcels usually lack utility infrastructure.

“These barriers have led to zero speculative development,” Bates says. “With speed to market so important to users, the region often loses out on opportunities.”

Even land costs in areas like Louisa County or Charlottesville are expensive, he adds, with markets around Charlottesville often charging $16 per square foot in rent. “So, if a business doesn’t have to be in those localities, they move on to markets with lower land basis.”

Furthermore, the only sites that are actually “ready to go” for development are owned by the local economic development authorities, which would rather the land go toward manufacturing projects that bring bigger numbers of jobs and more tax revenue, Bates says.

Bates has pitched numerous logistics and distribution deals to economic development authorities west of Richmond, he says, but they generally aren’t interested.

While there are notable distribution centers on the western side of the state operated by big companies like Amazon, Target and Walmart, the “low hanging fruit has been picked,” Bates says, and there are no more shovel-ready large industrial sites with utilities readily available beyond the existing ones owned by local EDAs.

While Luke “somewhat” agrees there are challenges with logistics development in Western Virginia, he still believes there are opportunities in that region and notes that land costs are “a fraction” of what they are in major Northern Virginia markets.

During the first quarter of the year, Colliers reports, The Meridian Group delivered a roughly 1 million-square-foot spec facility at One Logistics Park near Winchester, providing leasing options for logistics providers in an area where logistics space has been limited. Still, the report notes that there are no other speculative developments currently underway in the Winchester region.

Meanwhile, uncertainty surrounding President Donald Trump’s trade war and tariffs has been a mixed bag for the logistics industry, McKown says. On the tenant side, “deals aren’t stopping,” he says, “but they’re certainly pausing. … So, we’re not seeing deals die, but we’re certainly seeing deals take longer and go on pause.”

Cushman & Wakefield | Thalhimer forecasts that uncertainty surrounding the impact of tariffs, coupled with the increase of construction deliveries, is likely to push industrial vacancy rates in Hampton Roads up through 2025, which the firm says is “still healthy” but above the historic lows hit during the pandemic. Poston believes the tariffs won’t likely have a long-term impact on leasing, noting that building sites is a multiyear process and adding that many believe the tariff concerns will be a short-term issue. “Everybody’s kind of in a wait-and-see mode,” he says.

Despite the distribution industry facing a few challenges, Poston remains generally optimistic about the long-term outlook. There’s a general expectation among industry players that activity will pick back up by the end of the year, he says.

McKown is similarly optimistic about the market.

“You know, all the recent surveys are showing that all of the retailers and consumers want their products with next-day delivery or two-day delivery,” he says. “So, in order to do that, you have to warehouse those goods somewhere close to those rooftops. So, the long-term trends for industrial space, I’m very bullish on, and a lot of other institutional investors and folks much smarter than I am are as well.” ■