Industrial Outlook Baltimore/Washington. Q1 2013 Mixed start to 2013 across the region Baltimore industrial properties saw continued interest from tenants, most notably north of the city in Harford County, which translated into major occupancy gains in early 2013. The Northern Virginia and Suburban Maryland markets saw a drop in leasing and sales activity, partially attributable to reduced demand from the federal government and related contractors.
Suburban Maryland Baltimore Northern Virginia
Jones Lang LaSalle Industrial Outlook Baltimore/Washington Q1 2013 3 Baltimore/Washington industrial overview Economy The unemployment rate remained stable at 5.2 percent in the Metro DC market where the local economy continued to grow. Total non-farm payrolls consistently grew year-over-year at approximately one percent. Compared to first quarter 2012, employment in industrial occupying sectors was down slightly: trade and transportation dipped.2 percent, construction dropped one percent and manufacturing declined by.9 percent. An improving housing market, however, helped to drive industrial demand. Baltimore saw payrolls rise by 2.1 percent year-over-year in the first quarter of 2013 with trade and transportation posting strong growth. The sector has added 6,200 jobs over the past year and has consistently grown since 2011. The unemployment rate ticked upwards from last year, finishing at 7.0 percent. Manufacturing has continued to shed jobs, dipping to an all time low and losing 6.4 percent over the past year. The construction sector jumped by 7,700 jobs making it the fastest growing segment of the Baltimore economy. Market conditions After a historically strong 2012, the Suburban Maryland market cooled in the first quarter of 2013 while vacancy edged upwards. Construction continued on several projects in Prince George s County. A handful of move-ins by bulk warehouse occupiers drove vacancy down 200 basis points over the last year for warehouse/distribution space in Central Prince George s to 13.7 percent. A lack of quality Class A warehouse space in Prince George s County has driven developers to move forward on new construction and tenants to seek build-to-suit opportunities. Vacancy for flex space remained stubbornly high for Suburban Maryland and near the cyclical peak reached in late 2009. Reduced demand from life sciences, especially in Montgomery County, along with GSA and contractors has hampered recovery for the flex market. The year started quietly for Northern Virginia but occupancy gains in the Dulles Corridor and Southeast Fairfax helped to drive healthy absorption. The largest move-in during the quarter occurred in Southeast Fairfax where the GSA took occupancy of a recently delivered 112,500- square-foot warehouse/distribution building. Demand for warehouse/distribution space continued to drive the market, accounting for 302,235 square feet of net absorption across Northern Virginia. While demand from home construction services should continue to aid growth for the industrial market, sequestration and the effects on direct government spending and the related contractor Trend spotlight A lack of construction activity in Northern Virginia has helped to generate tight market conditions, especially in the Dulles North submarket where the vacancy rate for warehouse & distribution space has fallen to near 10 percent. Sequestration and reduction in federal spending will likely weigh on the industrial market in the coming year due to reduced demand from the GSA and uncertainty in the federal government contractor community. The lack of large blocks of Class A distribution space across the Baltimore metro market has led developers to increasingly consider speculative construction in the Baltimore/Washington Corridor and Harford and Cecil County. Baltimore/Washington industrial market Supply Construction Vacancy Availability Demand Pricing Total stock (s.f.) Under construction (s.f.) Rate Trend Rate Trend Q1 2013 net absorption YTD (s.f.) Average rental rate (nnn) Total industrial market 336,753,831 702,875 11.3% 15.6% 540,145 $7.08 Leased industrial market 258,122,265 702,875 13.8% 18.6% 557,425 $7.51 Leased warehouse/distribution 177,546,795 492,047 13.0% 18.3% 678,845 $5.68 Leased flex 80,575,470 210,828 15.6% 19.3% -121,420 $10.89
Jones Lang LaSalle Industrial Outlook Baltimore/Washington Q1 2013 4 Baltimore/Washington industrial overview, cont. community may hamper growth in the upcoming year. A lack of new construction in the pipeline, however, should help to keep market dynamics relatively balanced in the face of reduced demand. Baltimore/Washington property clock Positive momentum carried over from the fourth quarter into the new year for Baltimore with the warehouse/distribution market posting major net absorption in Harford County. Kenco s lease of 692,000 square feet of new construction at 521 Chelsea Road in the Mid-Atlantic Distribution Center drove a majority of the occupancy gains during the quarter. The largest lease transaction of the quarter closed in Harford County as well where Pier One Imports increased their presence in the market by 350,000 square feet at 400 Old Post Road. Due to the strong activity, additional construction may break ground during the course of the year on another speculative 650,000- square-foot building at the Mid-Atlantic Distribution Center. To the south of downtown Baltimore in the Baltimore/Washington Corridor, the quarter started softly but move-ins in the coming months will drive vacancy downwards as the market continues to tighten. Activity over the past years has left few large blocks of Class A warehouse/distribution space and developers have taken note. In Hanover on New Ridge Road, Liberty Property Trust purchased 18.6 acres and plans to break ground on 250,000 square feet of speculative construction. Outlook A limited construction pipeline from Baltimore to Northern Virginia should help to keep tenantlandlord dynamics stable overall in the near term and allow appreciation in asking rental rates. While cutbacks in federal spending pose a challenge to the region, particularly in Northern Virginia, a slow economic recovery should continue to drive occupancy gains for industrial space. Availabilities for large blocks of Class A distribution/warehouse space remain notably limited, especially in the Baltimore/Washington Corridor and Harford and Cecil County in Baltimore, which will continue to drive interest from institutional investors and has led some tenants to look towards build-to-suit opportunities. Rightsizing by government users, especially in the Northern Virginia for data centers, may pose challenges for the industrial market and will likely lead to flat conditions in 2013. Landlord leverage Dulles North Herndon-Reston Prince William West Dulles South, I-95 North, Baltimore/Washington Corridor Montgomery County Central Prince George s County Peaking market Rising market Falling market Bottoming market I-83 Corridor, Baltimore West, Baltimore County/City East Prince William East Frederick County Southeast Fairfax Arlington/Alexandria Northern Prince George s County, Baltimore Southeast Tenant leverage
Jones Lang LaSalle Industrial Outlook Baltimore/Washington Q1 2013 5 Baltimore/Washington industrial overview, cont. Average rental rate (triple net) YTD net absorption $12.00 $10.00 Baltimore $8.00 $6.00 Northern Virginia $4.00 $2.00 Suburban Maryland $0.00 Northern Virginia Suburban Maryland Baltimore -400,000-200,000 0 200,000 400,000 600,000 Pricing trends Demand trends Prices for warehouse space in the Dulles Corridor have rebounded from cyclical lows reached in 2010 and have posted consistent growth. For Dulles North, the asking average rate grew 3.3 percent year-over-year to $7.80 per square foot. Asking rates in Montgomery County for flex space dipped nearly seven percent compared to the beginning of 2012 to $14.00 per square foot. The warehouse/distribution market in the overall Baltimore region saw modest rental growth at 1.1 percent. For competitive Class A warehouse/distribution space in Baltimore, however, asking rental rates jumped nearly four percent to $5.24 per square foot. Even though vacancy has dropped sharply in Harford and Cecil County, rental rates have only appreciated at approximately one percent. Sequestration and reduced demand from the GSA and government contractors has weighed on demand for flex space especially across the Baltimore/Washington region. Only eight spaces above 250,000 square feet remained on the market with all of those in the Baltimore area. Tenants may begin to look more closely at markets such as Hagerstown as options closer to I-95 dwindle. Net absorption turned negative in Suburban Maryland at the beginning of the year. At 3636 Pennsy Drive, occupancy dropped by 122,672 square feet due to a space reduction by a tenant in the building.
Jones Lang LaSalle Industrial Outlook Baltimore/Washington Q1 2013 6 Baltimore/Washington leased industrial market [excluding owner occupied facilities] Methodology The leased industrial sector excludes owner occupied product from the market s data set, and provides a rental equivalent perspective for industrial buildings that are leased by tenants. Buildings can move into and out of this data set based upon being purchased or sold by a particular user. Recent lease transactions Tenant name Location Submarket Deal type Size (s.f.) Pier One US Lumber Company Uni-Select USA Collins Brothers Moving 400 Old Post Road 504 Advantage Way 8420 Westphalia Road I-95 North/Harford County I-95 North/Harford County Central Prince George s County New 350,000 New 114,608 New 77,285 45181 Global Plaza Dulles North New 44,437 GSA 6500 Sheriff Road Central Prince George s County New 43,846 Sector trends Baltimore recorded nearly 600,000 square feet of positive net absorption in the beginning of 2013, compared to just 288,276 square feet of net absorption in the first quarter of 2012. The warehouse/distribution market continues to comprise the bulk of occupancy gains. Fundamentals turned negative in Suburban Maryland as vacancy edged upwards 50 basis point to 15.7 percent. Both flex and warehouse/distribution space experienced weakness during the quarter. Construction activity has dropped since 2012, especially in Northern Virginia. After the Baltimore/Washington region saw nearly 1.4 million square feet of new product come to the market last year, only 702,875 square feet remains in the pipeline. The Dulles Corridor continued to be the major driver in Northern Virginia, accounting for 140,000 square feet of net absorption during the first quarter. The submarket has accordingly seen rental rates rise over three percent year-to-year. Total leased industrial market (excluding owner occupied facilities) Direct Total Q1 2013 net Pricing Supply total Vacancy Vacancy absorption YTD Average rental stock (s.f.) rate Rate (s.f.) rate (nnn) Total leased industrial market 258,122,262 13.4% 13.8% 557,425 $7.51 Warehouse/distribution 177,546,795 12.6% 13.0% 678,845 $5.68 Flex 80,575,470 15.1% 15.6% -121,420 $10.89
Jones Lang LaSalle Industrial Outlook Baltimore/Washington Q1 2013 7 Baltimore/Washington industrial capital markets overview After a jump in investment sales at the close of 2012, which helped push activity on the year to near 2007 levels, only a handful of transaction closed in the first quarter of 2013. In Baltimore, transaction volume totaled just $33.4 million compared to over $130 million at the beginning of 2012. Two owner/user sales closed in the Baltimore/Washington Corridor and in Baltimore County East, Principal Real Estate Advisors purchased 10000 Franklin Square Drive. The distribution building was fully vacant at the time of sale and traded for $43 per square foot. In the I-395 Corridor in the inner suburbs of Northern Virginia, several owner/user sales closed during the year amounting to $14 million of transaction volume. Investors continue to show strong interest but activity from last year left few buildings on the market for sale. Baltimore/Washington select sales White Marsh 10000 Franklin Square Drive RBA 392,500 s.f. Buyer Principal Real Estate Advisors Seller White Marsh Distribution LLC Price (p.s.f.) $43 Date sold January 2013 Transaction volume ($mil.) and average cap rate $1,800 $1,600 $1,400 10% 8% Jessup 7825 Rappahanock Avenue RBA 120,000 s.f. Buyer Pete Pappas & Son Seller Guest Services Price (p.s.f.) $44 Date sold January 2013 $1,200 $1,000 $800 $600 Northern Virginia Suburban Maryland Baltimore Regional Cap Rate 6% 4% Chantilly 25391 Pleasant Valley Road RBA Buyer 39,125 s.f. United Granite of Virginia $400 $200 2% Seller Dulles South Partners LLC Price (p.s.f.) $66 Date sold February 2013 $0 2006 2007 2008 2009 2010 2011 2012 YTD 2013 0%
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