June 1, 2020
By Marc Tasker, Principal, NAI KLNB
Northern Virginia’s industrial market can be summed up in a tale of two worlds – pre and post COVID-19. Pre-COVID, the industrial market was hitting on all cylinders. Peak pricing could be found in both lease rates and sale pricing with concessions minimal to non-existent. Class A product commanded a premium as demand continued to outpace supply. The flex market was also performing well, with increasing rental rates and stabilized vacancy.
Flash forward to the second half of March and the worldwide shutdown. The COVID-19 pandemic has sent shock waves through the commercial real estate industry; the impacts of which have yet to be fully realized. Fortunately, Northern Virginia’s industrial market contraction has been minimal when compared to the retail, office and hospitality sectors. In fact, most experts think the industrial market will weather the storm best, with e-commerce as the major driver. The pandemic has accelerated the adoption of online shopping, which will significantly increase warehouse and logistics demand for e-fulfillment. The region’s density and demographics position us as a last-mile distribution center, the sweet spot for future demand. While initially we may see some weakness enter the market, we anticipate that to be short term, subject to the reopening of the economy.
Northern Virginia’s data center market, the largest in the world, continues to impact industrial fundamentals as it absorbs land out of the development pipeline. With millions of additional square feet under construction and accelerated demand, we see this trend continuing. This will further support the industrial recovery by keeping the supply/demand balance in check. In addition, support industries that will help maintain and build the facilities are being created, and thus add another catalyst to the market recovery.
The flex market may experience a more dramatic contraction, depending on how much longer the economy remains in lockdown. It is more vulnerable with a higher concentration of office related, quasi-retail and indoor recreation uses. Some of these small businesses may not survive, as their ability to operate in the new normal may not be economically feasible. As such, we foresee an increase in vacancy coupled with decreasing rental rates for at least the next 12 months.
Looking ahead, there is light at the end of the tunnel. The government stimulus injected into the economy is unprecedented, and our region is well-situated to benefit. As the supply chain shifts to adapt to the accelerated e-commerce world and we learn to live with the effects of COVID-19, demand will increase to meet if not exceed pre-COVID levels.
For comments, questions or concerns, please contact David Cohen