CoStar: Rents are up for Washington’s warehouses

June 29

While it might be overshadowed by the more glamorous office, retail and apartment property types, the warehouse market in the Washington region has a lot more going for it than most realize.

Warehouse vacancy has steadily declined since peaking at 12 percent in the third quarter of 2010, and currently sits below 9 percent. The region’s warehouse market has posted 12 consecutive quarters of positive net absorption, which only a handful of other U.S. industrial markets can claim. Since 2012, it has seen strong demand, with more than 5 million square feet of positive net absorption and little new supply on the horizon.

And while the region may never rank among the largest warehouse/industrial markets in the country because of supply constraints and expensive land prices, it does serve a robust local economy, which is relatively insulated as the home of the nation’s capital.

Demand for warehouse space is driven predominantly by retail spending (more consumer spending leads to increased inventory that needs to be warehoused), homebuilding (construction materials, home appliances, etc.), and local distribution from small users.

Since 2010, retail sales in the market have averaged 5.5 percent year-over-year growth, well above the historical average of 4 percent since 1990. New home construction is also making a healthy recovery, with over 54,000 new homes opening in the area in 2013, over 20 percent more than in 2012 and over 40 percent more than in 2011. While that is still well below pre-recession levels when new homes starts averaged over 110,000 per year between 1998 and 2003, new home construction in the Washington region is forecasted to average 118,000 per year from 2015 to 2018.

Given such strong demand, it is not surprising that rents for warehouse space are following suit, steadily increasing since 2011. In 2013, warehouse rents saw the biggest year-over-year increase since the recession, posting 5.6 percent gains to average just under $8 per square foot.

If new supply doesn’t overwhelm the market, rent growth should remain positive over the next few years, and levels could reach its historical highs, which hasn’t gone unnoticed by investors. Major institutional investors such as Blackstone, TIAA-CREF and Cabot Properties were among the buyers in 2013, when nearly $700 million in industrial properties sold across the region.

Comparing this to the region’s office market, which has elevated vacancies of over 13 percent and has yet to fully recover, one can gain a new appreciation for the local industrial market.

Charles Schwieger is a real estate analyst with CoStar Group in the District.

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