Delta: Industrial-flex market seeing modest expansion

The market for industrial or flex space (usable for office or industrial) improved in the Washington-Baltimore region during the first quarter of 2012. About 1.4 million more square feet of space was occupied than vacated during that period, similar to the total for all of 2011.

Vacancy edged down across the region during the first quarter. But although most fundamentals are improving, rents remain under pressure in most areas because of elevated vacancy rates. We expect these gains to continue the rest of the year, albeit at a slower pace compared with past cycles, as tenants remain hesitant to lease space because of uncertainty regarding the federal budget.

Suburban Maryland

Suburban Maryland enjoyed 330,000 square feet of so-called positive absorption in the first quarter, meaning 330,000 more square feet of industrial or flex space was occupied than vacated, exceeding the 56,000 square feet absorbed during all of 2011. This compares to the 10-year annual absorption average of 550,000 square feet a year. The overall industrial-flex vacancy rate decreased to 11.5 percent at the end of the first quarter, from 11.8 percent at the end of 2011. Asking rents were flat during the first quarter after declining 0.1 percent during 2011.

There was 512,000 square feet of industrial-flex space under construction or renovation in the first quarter, up from 370,000 square feet one year earlier. The suburban Maryland industrial-flex market should improve slowly during the balance of 2012. Although demand is likely to be light, vacancy should gradually edge down, as demand picks up pace by late 2012.

Northern Virginia

Net absorption of industrial-flex space in Northern Virginia totaled 214,000 square feet during the first quarter, a pace that represents a slight uptick compared to the 847,000 square feet absorbed during all of 2011. This compares to the 10-year average of 1 million square feet. The overall industrial-flex vacancy rate edged down to 10.8 percent at the end of the first quarter, from 10.9 percent at the end of 2011.

There was 173,000 square feet of industrial-flex space under construction or renovation in Northern Virginia as of the first quarter, down from 658,000 square feet one year ago. Rents increased 0.4 percent during the first quarter, compared to increasing 0.7 percent during all of 2011. Rents should gain traction during the balance of 2012, as demand picks up momentum. Overall, Northern Virginia’s industrial-flex market should continue its recovery — leading the Washington area — and remain desirable in the long-run because of its location along the Interstate 95 corridor and proximity to Dulles Airport.

District of Columbia

Net absorption of industrial-flex space in the District totaled 57,000 square feet during the first three months of 2012, compared to 119,000 square feet during all of 2011. The 10-year annual average absorption is negative 19,000 square feet. The overall industrial-flex vacancy rate was 12.0 percent at the end of the first quarter of 2012, down from 12.5 percent at year-end 2011.

There are no notable projects under construction or renovation; however, some industrial-flex buildings are likely to be converted to alternative uses in the near term. Industrial-flex rents remained flat in the District during the first quarter, after declining 2.5 percent during all of 2011. The District’s industrial-flex market should improve modestly the rest of the year, although rents could remain under pressure as vacancy remains elevated.

Elizabeth Norton is a vice president and mid-Atlantic research director at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.