Virginia's port is a big driver for industrial real estate

by Rob Walker
for Virginia Business
December 2006

The Port of Virginia's massive expansion in Hampton Roads is boosting Virginia's industrial real estate market. With speculative warehouse and distribution projects going up in the region, localities here are gaining national attention as attractive industrial sites.

Ripple effects from the port's growth are boosting industrial real estate in other parts of the state as well.

"The expansion taking place at the Port of Virginia is the key to industrial development throughout the state," says Rob Starner, executive director for the Industrial Asset Management Council (IAMC), a national group devoted to industrial development and management.

Already the second busiest general cargo port on the East Coast, a new terminal in Portsmouth under construction by APM Terminals Virginia (a subsidiary of the Danish conglomerate A.P. Moller-Maersk) will double cargo capacity in the next few years. Increased traffic from container ships will require support services such as warehouses, distribution centers, transportation hubs and assembly operations.

This summer, Hampton Roads earned the top four spots on IAMC's industrial site listings. Suffolk led the rankings, followed by Virginia Beach and Norfolk (tied for second), and Chesapeake.

One company responding to the increased demand for industrial space is Liberty Property Trust, a Pennsylvania-based real estate investment trust. Craig Cope, a vice president and area manager in Hampton Roads, says Liberty plans to develop a million square feet of speculative industrial space in Suffolk during the next few years. The company is building out a $20 million, 434,000-square-foot project now. One building is already up and, when complete, Bridgeway Commerce Center will offer two more buildings on more than 20 acres. Tenants in the project include direct retailers, logistics businesses, government and defense contractors and national companies such as Sysco Foods and Columbia Natural Gas.

National developers are getting in on the action, too. McDonald Development Corp. in Atlanta and BPG in Philadelphia are building speculative industrial projects in Hampton Roads. While the pending demand is for warehouse and distribution space, intermodal facilities will be needed in the future, says Clay Culbreth, senior director of industrial properties at GVA Advantis in Norfolk. Culbreth represents McDonald, which bought a 114-acre parcel in Suffolk so it can develop an $80 million business park to service the nearby port.

By the third quarter of this year, Hampton Roads had an estimated 1.5 million square feet of warehousing and distribution space under construction. Thalhimer First Vice President Patrick Mumey, a longtime broker of industrial space in Hampton Roads, says, "It's the most active market I've seen in 20 years."

While the closing of the Ford Motor Co. plant in Norfolk by Sept. 30, 2007 is a blow for Hampton Roads, overall Virginia's industrial market is positioned well for growth. "We in Virginia have continued to trade on our strengths, which are location, affordability of land, fairly low building costs and a good work force," says David M. Williams, managing director for commercial and industrial brokerage with Grubb and Ellis/Harrison and Bates in Richmond.

Plus, Virginia is the northernmost right-to-work state in the East. "Given the labor problems they've experienced at West Coast ports, this really generates industrial activity here," adds Williams.

Overall, vacancy rates for industrial sites in Virginia are down. In Hampton Roads, rates are at their lowest point since 1995. They were 4.3 percent at the end of the third quarter, down from about 4.5 percent the year before, according to Thalhimer/Cushman Wakefield. Nationally, the average is 7.7 percent. Brokers expect the downward trend to continue in 2007 and for rental rates to rise.

In Richmond, vacancy rates have declined for several quarters, although at rates ranging from 8 to 12.8 percent, they're much higher than in Hampton Roads. "We're seeing a lot of older industrial buildings coming back," says Chip Louthan, associate broker with Porter Realty Co. Contributing to the trend in Richmond: rising construction costs and the availability of tax breaks for renovation projects.

Industrial clients in central Virginia come from the service sector, government, and health care and pharmaceuticals, as well as the growing retail market. But the biggest generator has been residential growth, with industrial space needed for building supplies and appliances, and by a variety of building contractors.

In Northern Virginia, vacancy rates are running about 8 percent, though they vary widely from place to place, according to Transwestern Commercial Services, one of the largest players in the Washington area's unusual industrial market.

Caulley Deringer, Transwestern's senior vice president at Tysons Corner, points out that high prices and a shortage of land prevent the region from being a traditional industrial area. The average industrial building is small - about 75,000 square feet - and it's likely to be a flex building, with as much office as industrial space. Clients are technology firms and service operations such as printers and contractors.

The biggest force in the region, Deringer says, may be defense and homeland security. Transwestern is developing Dulles Woods in Loudoun County and Gunston Commerce Center along I-95 near Fort Belvoir, which will involve contractors such as Lockheed Martin and Northrop Grumman.

Virginia has seen some exciting industrial projects recently that run counter to state and national trends.
The Swedish furniture manufacturer IKEA will build a new manufacturing plant on 209 acres in the Danville area. The $85 million plant promises hundreds of jobs and corollary development in a region where manufacturing losses have been devastating.

October brought the opening of Goya Foods Inc.'s 109,000-square-foot warehouse and distribution center in SouthPoint Business Park in Prince George County. The $5.1 million investment illustrates two rapidly emerging trends - global trade and the rising Hispanic population in Virginia and the nation. Goya Foods is owned by a Hispanic.

While the future for the warehouse/distribution market in Virginia appears bright, there are concerns, with the top one being transportation. As Liberty Trust's Cope observes: "Sometimes we wonder if our highway system can keep up with current capacity, much less the demand we are predicting."