In 2012, shifts in retail and technology-oriented businesses generated solid demand for flex-industrial space in the Washington region, driven in part by retailers snapping up industrial space to house online operations and data centers expanding their footprint.
Flex properties are typically part office and part warehouse, while industrial properties are typically warehouses, manufacturing facilities, data centers or distribution centers.
Net absorption (the difference between space leased and space vacated) totaled 3.1 million square feet in the Washington area during 2012, while vacancy declined 1.1 percentage points during the past 12 months. Given improving conditions, landlords were eager to increase asking rents during 2012, yielding a regional rise of 3.2 percent.
This class of properties has been a stand-out compared to others, and we expect this growth to continue during 2013. Growth may be slow during the first half of 2013, as tenants remain hesitant about leasing space because of uncertainty regarding the federal budget, but business is likely to pick up during the second half of 2013, followed by a more robust market in 2014.
The District’s flex-industrial market experienced improving conditions during 2012. Net absorption of space totaled 135,000 square feet during 2012, compared with 119,000 square feet during 2011. This compares to the 10-year annual average absorption of negative 8,000 square feet. The District’s overall flex-industrial vacancy rate (including sublet space) was 11.3 percent at year end, down from 12.5 percent at the end of 2011.
Flex-industrial asking rents increased 3.9 percent in the District during 2012, after declining 2.5 percent during 2011. Rents for properties considered “flex-warehouse” increased 3.7 percent during the past year and rates for lab space climbed 4.3 percent.
The District’s flex-industrial market should experience improving conditions during 2013. Although demand will likely remain light, it should be enough to push overall vacancy down from 11.3 percent today to 10.4 percent by December 2013. As vacancy edges down, asking rents should rise 3.0 percent to 4.0 percent during 2013.
Net absorption in Northern Virginia neared the long-term average of 1.2 million square feet and the overall vacancy rate declined 0.8 percentage points during the past 12 months, to 10.1 percent, as demand gained traction. Given improving market conditions, asking rents climbed 2.9 percent during the past year. More projects began in 2012 as developers took advantage of the demand for data center space.
The suburban Maryland flex-industrial market ended 2012 on solid ground, as net absorption was well above-average, the overall vacancy rate declined 1.4 percentage points to 10.4 percent, and asking rents climbed 3.3 percent during the past year. Net absorption was boosted due to a handful of large lease deals, but activity from smaller users remains limited. Although the overall vacancy rate has declined since the end of 2011, it remains elevated compared to a low of 8.1 percent at the end of 2000.
Maeve Gallagher is a senior associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.