CITY HIGHLIGHT, OCTOBER 2007

WASHINGTON D.C. CITY HIGHLIGHTS
Ralph Haught, Bob Gibbs, Phil Ruxton & John DiCamillo

Washington D.C. Industrial Market

The industrial market in the Metropolitan Washington, D.C. region — consisting of the city of Washington, D.C., two suburban Maryland counties and Northern Virginia — is a study in contrasts.

The industrial market within the District of Columbia has been largely a non-story until recently. The market is comprised of 11.3 million square feet, with a 3.4 percent vacancy rate. Vacancy has been shrinking as properties were converted to higher end uses. The cost of land, which exceeds $25 per square foot for the least attractive sites, rules out most new development. However, Patriot Equities’ pending acquisition of the former Hecht Company building on New York Avenue is likely to significantly reverse recent trends. When that 777,980-square-foot building comes on the market, the vacancy rate will increase by 6.2 percent to 9.6 percent. Even with a rental rate of $14.00 per square foot NNN, the building is expected to draw significant interest.

In suburban Maryland, Montgomery County is another small market (24 million square feet with a 7.7 percent vacancy rate) that features limited opportunity for new development. The last large industrially zoned site is a 110-acre piece owned by Miller and Smith in Gaithersburg. When finished, these sites will trade north of $15 per ground foot.

Prince George’s County is the land of opportunity for both developers and tenants. There are four new major industrial developments, which include the following:

• The “110-acre Brickyard” in Laurel is currently in Phase I. Developer Jackson Shaw, will build and sell five 20,000 to 30,000-square-foot buildings.

• Developed by Baltimore-based Atapco Properties, Steeplechase 95 International Business Park is projected to deliver up to 800,000 square feet of industrial product. Located on I-495 at the new Ritchie Marlboro Interchange, the park is generating lots of interest: The first building of 137,800 square feet is leased to Creative Touch Interiors and the second building of 60,000 square feet is fully leased to Restaurant Depot. Two new speculative buildings of 56,000 square feet and 132,260 square feet will deliver in September with asking rents of $7.40 NNN and $6.85 NNN respectively.

• Annapolis-based Osprey Properties is developing Eastgate Business Park, comprised of 70 acres located in Upper Marlboro. Phase I, a 60,000-square-foot rear loaded building, sold for $90 per square foot in 2006 and the land for Phase II, which is a planned 220,000-square-foot building, was sold to Capital Lighting and Supply this year. Capital Lighting will construct the building themselves. The developer of the project is currently in for permits for Phase III and IV both a 70,000-square-foot and 34,000-square-foot rear loading buildings with asking prices of $130 per square foot.

• Finally, Philadelphia-based Preferred Real Estate is redeveloping more than 1 million square feet of industrial space and 300,000 square feet of office space at National Commerce Park in Landover, Maryland, the site of the former Giant Food Headquarters and distribution center.

The story in the Northern Virginia market is best summed up by the advice of newspaper editor Horace Greeley to unemployed to New Yorkers a century ago, “Go west young man.” With developers looking to maximize their assets on valuable land directly outside Washington, D.C., they have been choosing to construct more non-industrial products, forcing new warehouse and flex construction further west.

Industrial developers’ movement westward to Loudon, Prince William and Winchester, Virginia, is the result of the lower cost basis of land, state-of-the-art product, proximity to labor force, less congestion on the transportation grid, and accessibility to major logistic nodes like Interstates 81 and 66, Washington–Dulles International Airport and the Virginia’s Inland Port. With the exception of the Capital Lighting and Supply renewing in Springfield, the largest warehouse leases signed during the second quarter 2007 were located in the outer submarkets. Large institutional developers such as First Industrial, Opus, Florida Rock, Johnson Development and ProLogis have all purchased land in the western submarkets and will build speculative development projects in 2008.

Statistically speaking, the market remains strong. Warehouse demand, as measured by net absorption, fell during the second quarter of this year. During this time period, the warehouse sector had 144,288 square feet of space returned to the market. Despite falling demand, the warehouse vacancy rate, which increased from 5.35 percent to 6.21 percent, is still relativity low, and there continues to be significant activity by tenants looking for space.

Two buildings in Prince William County, totaling 115,531 square feet, delivered during the quarter. Prince William County and Loudoun County have approximately 712,752 square feet of warehouse space currently under construction. In Winchester, Virginia, Opus is expected to break ground within the next 30 days on 300,000 square feet of speculative development along with Johnson Development’s 365,000-square-foot speculative project.

Options for industrial users will continue to move south and west as industrial product closer in to Washington, D.C., continues to get redeveloped. As new product, especially flex, is brought online and options inside the Capital Beltway continue to evaporate, rental rates are only expected to rise as landlords push to achieve pro forma on their new buildings.

— Ralph Haught, is first vice president at CB Richard Ellis (CBRE) focusing on the industrial market in suburban Maryland and DC. Bob Gibbs is CBRE senior vice president and focuses on the Northern Virginia industrial Market.

Washington D.C. Retail Market

Surrounded by a rising number of see-through commercial office buildings, home foreclosures and a general slowdown in many sectors of the regional real estate market, the retail industry in Washington, D.C. continues to flourish. Like the famous President of the United States in the 1980s, retail in this area of the country has a “Teflon” quality to it. Borrowing another famous icon, the industry simulates those batteries in the famous bunny that “keeps on going.” You get the idea.

What makes Washington, D.C. retail so special --— so powerful? According to recent CoStar Mid-year Retail Report, the market consists of nearly 4500 retail properties comprising approximately 145 million square feet of space. Vacancy is less than four percent and the average rental rate is approximately $28 per square foot. How do those numbers compare to the market you are working in?

In D.C., the federal government remains the 500-pound gorilla that everyone keeps asking out on a date. It is not just the gorilla itself that feeds this rapidly accelerating train, but also the tentacles that branch off, such as defense contractors, the bio-tech industry and the information technology sector, which all have established a strong presence in the area and keep growing. There seems to be no end in sight to the appetite of this expansion and the “good times” for retailers.

This solid infrastructure of employment translates to more housing starts and the need for additional retail projects to service the consumer base. Washingtonians tend to be affluent, so high-end retailers are attracted here and there is a large segment of unmarried people, which means more frequent social events, including dining at restaurants and buying more clothes.

Developers active in and around Washington, D.C. include Donatelli & Klein, Grid Properties (which is also works in Harlem), Horning Brothers, Forest City and Monument Realty.

The neighborhood of Columbia Heights — where a Metro Station at 14th and Irving Street is the focal point — is home to DC USA, one of the most significant projects in the City. DC USA is a three-level, 500,000-square-foot development that is currently under construction. The project willb e anchored by Target, which is contained on the second and third floors, and should be open by March 2008. This Grid Properties project also includes a Best Buy, Bed Bath & Beyond, Washington Sport Club and Marshalls. Adjacent to DC USA on two separate street corners are Donatelli & Klein’s Highland Park and Kenyon Square. Just one block north is the former Tivoli Theatre, a famous icon that was recently re-developed. 

The new baseball stadium for the Washington Nationals is set to open next spring, and this has spurred a significant amount of development along the South Capital and M Street corridors. Although the local team isn’t winning many games, the park has created numerous winning opportunities for local and national retailers. Monument Realty has broken ground on a project featuring 295,000 square feet of office space, 50,000 square feet of retail space and 375 residential units, positioned just north of the stadium.  Forest City intends to start the first phase of a mixed-use development early next year that will include 300,000 square feet of office and a grocery store. 

A number of new residential projects are springing up in the District and all contain ground floor retail components. Lakritz Adler Development is building condos at Moderno at 12th and U Streets. City Vista, located at 5th and K Street NW will include 250 apartments, 440 condos and a Safeway. Additional retailers signed include Results Gym and Fifth Street Hardware, which is owned by a local husband and wife team.

— Phil Ruxton is managing director for KLNB Retail’s Washington, D.C. office.

Washington D.C. Office Market

The Washington, D.C. metropolitan region’s market fundamentals continue to bolster this 278 million-square-foot office market.  The region’s growth during the past four quarters has been exceptional. During the past year, the market has delivered 5.5 million square feet and at the same time had the average Class A asking rental rate climb by 4 percent and the Class B asking rents increase by 6 percent — an indication of additional market demand. The presence of the federal government and federal contractors has contributed to the consistent job growth and demand for both existing and new office space.

In the District of Columbia, the office submarkets are experiencing a noteworthy rental rate increase this year. Amidst rising operating and construction costs, a tightening Class B market and portfolio transactions which demand higher returns, asking rental rates in D.C. are spiking, and today average $49.77 for Class A product. An indicator of the direction the market is heading, new construction in the choicest locations are projecting asking rents that surpass $80 for the top floors.

In the CBD submarket, Class B has a remarkable vacancy rate of only 3.8 percent and has had its average asking rates in Class B buildings rise 11.5 percent during a 12-month period.  The redevelopment of older Class B properties, particularly along the K Street Corridor, will keep the upward pressure on rents during the next several quarters. This rental rate spike combined with tight market conditions has also led to tenants looking outside the District for space. Notable move-outs include the Corporate Executive Board, the Bureau of National Affairs and FEMA which are relocating to close-in Arlington County. To-date, these moves have not impacted the city’s vacancy rate, which has hovered near 7 percent for most of the last decade, and large blocks of space are typically quickly reabsorbed. 

The suburban markets in the Washington metropolitan area are also showing positive momentum, with the closest-in submarkets in each region witnessing proportional growth from tenants leaving the District.

In Northern Virginia, net absorption has outpaced deliveries for the past 5 years, allowing vacancy to approach single digits. The effect of downtown D.C. losing tenants to close-in suburbs is most evident in the submarkets in Arlington County, as roughly half of the 2007 Northern Virginia net absorption total has come from Arlington. 

Construction in Washington’s suburban markets is focused primarily outside of the beltway and is being driven by tenants looking to higher quality buildings at favorable rates. Market watchers are closely monitoring lease up levels in the Dulles Corridor which has several buildings ready to deliver. 

In Suburban Maryland, Bethesda is driving the market with record high asking rental rates and net absorption.  Tenants who are price sensitive are seeking space further up the Interstate 270 corridor and on into Frederick, a boon to markets which have lower economics and greater available supply, a trend which will improve the market fundamentals of all of Suburban Maryland

— John DiCamillo is a senior research analyst with Grubb & Ellis | Property Solutions Worldwide.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.