2017 Ends with a Bang
The fourth quarter of 2017 served as another positive chapter in the ongoing story of improving market dynamics. All indicators moved in stronger directions, including robust net absorption, a reduction in vacancy rates and an increase in asking and taking rents. Despite these positive indicators, spec development continued to be constrained in the face of rising demand.
All major submarkets in the northern Shenandoah region along I-81 contributed to this story. In Winchester, the FBI broke ground on its 256,000 square foot document archive facility along Route 50/The Millwood Pike. Just north of Winchester, in Clearbrook, Amazon took possession of their one million square foot e-commerce distribution center. Further north in Martinsburg, Proctor & Gamble continued to work furiously to complete the first 1.07 million square feet for occupancy later in the year. Up in Hagerstown, Knauf Fiber subleased 282,300 square feet from Kellogg’s at 11841 Hunters Green Parkway.
Strong demand rolled into 2018 with most larger blocks of remaining space experiencing good activity from expanding local users and new prospects exploring the market for the first time. Despite these improving numbers, land prices have remained flat and are a reasonable bargain when compared to markets such as the Lehigh Valley and Central Pennsylvania. We predict increasing strength in market indicators across the board for the remainder of 2018 as new development groups take advantage of bargain land prices and enter the market to satisfy growth and relieve pressure off dwindling warehouse inventories.
DemandDemand for industrial space in the Shenandoah Valley market remained strong, adding 1,341,273 square feet of net absorption during the fourth quarter of 2017. This brought the 2017 total up to 2,142,200 million square feet marking the sixth straight quarter of overall positive net absorption. Warehouse product saw a spike, increasing 1,341,335 square feet, with most of that coming from Amazon occupying slightly over 1 million square feet. Demand for flex remained flat, decreasing by a mere 67 square feet.
SupplyDuring the fourth quarter, the only building to deliver was 281 Woodbine Road, a 1 million square foot facility in Frederick, VA. This was a build to suit for Amazon that uses the entire building as a distribution center. One building broke ground during the fourth quarter, the FBI’s 256,000 square foot Central Records Complex, also in the Frederick County, VA submarket. There were five buildings under construction at the end of 2017, totaling 2.01 million square feet of space. The largest on Tabler Station Road in Berkeley County, WV is a 1.07 million square-foot build-to-suit for Procter & Gamble and is expected to deliver during the first quarter of 2018. Stonewall Industrial Park Phase III, a 287,000-square-foot building, is also underway in the Frederick, VA submarket. 888 International Parkway is a 250,000 square-foot project that is underway in the Botetourt submarket with an expected delivery during the first quarter of 2018.
VacancyThe Shenandoah Valley industrial market’s overall vacancy fell, dropping from 6.6 to 6.2 percent. Vacancy rates for the warehouse sector alone dropped 46 basis points during the quarter to end at 6.0 percent while the flex sector remained flat, ending the quarter at 9.9 percent.
Overall asking triple net rates in the Shenandoah Valley industrial market rose slightly during the quarter, increasing $.04 to end the quarter at $4.12 per square foot. This compares to a year ago when the rental rate stood at $4.01 per square foot at year-end 2016. Overall average rental rates for warehouse product increased $.05 to end the quarter at $4.00 per square foot while rental rates for Flex product fell during the quarter, decreasing from $5.51 to $5.42 per square foot. Notwithstanding the above, average Class A warehouse rates were between $4.50 and $4.75 NNN and vacancy rates were below five percent.