Need for speed
Developers race to build warehouses amid site shortage
Geoff Poston likens the current market for building, buying and leasing warehouses and distribution centers to the mid-1800s California Gold Rush: Everybody wants in.
Poston, vice president of Cushman & Wakefield | Thalhimer’s Hampton Roads industrial group, says demand has never been greater for industrial real estate, creating a tight market with low vacancy.
“The amount of speculative development of industrial space taking place right now is unprecedented,” says Jason El Koubi, interim president and CEO of the Virginia Economic Development Partnership. “Some of this space will go to manufacturing, but much of the demand is being driven by warehousing and distribution needs.”
One leading factor behind this drive is companies attempting to keep up with e-commerce giant Amazon.com Inc. in getting products to consumers quickly.
Amazon is constantly pushing the envelope, shortening delivery windows from what was once five days to same-day delivery, says Marc Wulfraat, founder and president of Canadian logistics firm MWPVL International Inc.
“That speed to market is a competitive advantage,” he says, “but what it requires is that you have more buildings that are closer to urban metro markets.”
And adding more buildings and sites is easier said than done, particularly around in-demand markets and locations with ready access to interstates and shipping routes.
“The big difference is we have a lot of institutional developers in the market tying up sites left and right in order to accommodate the demand that they’re seeing,” says Poston, adding that “all of that developer demand is just really creating a frenzy.”
Running out of land
In Chesterfield County, every piece of property zoned for distribution centers, warehouses or manufacturing facilities is either under contract or in negotiations, says the county’s director of economic development, Garrett Hart.
“It’s the most active market I’ve seen in my 40-year career,” Hart says. “I’m spending my days trying to look for property to get more property zoned and in place and ready to go.”
But it’s not just Chesterfield where industrial sites are scarce and development is booming. Across the commonwealth, the demand for more warehousing and distribution space is causing developers to scramble.
“Where I think the demand is different today is there is a shortage, especially in Virginia, of zoned, approved sites that are ready to go,” says Mark Hourigan, founder and CEO of Richmond-based construction and development firm Hourigan Development.
In the past several months, hundreds of jobs and millions of dollars in capital investment in warehouses and distribution centers have been announced in Virginia.
Goochland County-based Performance Food Group Co., a Fortune 500 food products distributor, will invest $80.2 million in a new facility in Hanover County. In the first quarter, it will break ground in Ashland on a 325,000-square-foot warehouse, scheduled to be built over 18 months.
Hanover County Director of Economic Development Linwood Thomas says big economic development announcements like that keep coming.
“What will happen over the next 24 to 36 months is about an additional 6 million square feet of new industrial space, warehouse, logistics [and] industrial supply [space]” will be built in the county, he says, which will increase Hanover’s current industrial inventory by more than 40%.
Meanwhile, Amazon has facilities popping up all over the state. In Suffolk’s Northgate Commerce Park, Amazon is building a nearly $230 million, 3.8 million-square-foot, five-story robotics fulfillment center. It’s also constructing a fulfillment center in Henrico County near Richmond Raceway and an import processing center in Chesapeake. Amazon has at least 15 facilities in Virginia, with more coming.
Lang Williams, Colliers International’s Norfolk-based senior vice president, works with a lot of developers and companies seeking space.
He says the past 18 months have been “without precedent” in the Norfolk region. “We’ve really kind of caught up with the rest of the country in terms of just massive demand for all logistics and warehousing space.”
The difference now, Williams adds, is that there are two and three companies “practically fist-fighting for space.”
“Normally we don’t have that problem. Normally, we’re pursuing and trying to make a deal. Now, the tenants are scrambling to find a space, no matter the cost, wherever they can get it, because they don’t have any options around,” he says.
Over the past several years, Virginia localities have been eliminated from consideration for several economic development projects involving warehouses or distribution centers due to a lack of site readiness.
“These sites were unable to meet the project’s start-up schedule due to time required to fulfill a number of demands,” including due diligence, permitting and utilities and road infrastructure, El Koubi says.
The lack of available, ready sites for warehouse and distribution center projects is a statewide problem, he adds, “but more pronounced along the Interstate 95 and 81 corridors as well as Hampton Roads, where demand is higher.”
In the Fredericksburg region, less available land means building farther away from I-95, though localities have done a good job pivoting, says Todd Gillingham, vice president of marketing and operations for the Fredericksburg Regional Alliance at the University of Mary Washington.
While alternative distribution routes are available, the lack of available sites “will soon become an obstacle for the Fredericksburg region and much of Virginia,” Gillingham says. “I know there have been quite a few projects we lost out on because there wasn’t available existing industrial space.”
Joe Marchetti III, Hourigan’s president of development, says one of the macro trends he and Mark Hourigan picked up on years ago was the shift to e-commerce.
But the pandemic accelerated everything, he says.
“That’s why the pace feels frenetic,” Marchetti says.
“I think cities like Richmond are becoming the next desired destination for these logistic companies,” Hourigan says. “When you can get to 40% of the U.S. population from a single day’s drive from the Richmond area, it makes it very desirable. The interstate system, the port system or rail system just add to the really high desirability of our marketplace.”
One site Hourigan is working on is for home goods retailer Lowe’s at the Deepwater Industrial Park in South Richmond. In 2018, Hourigan bought 110 acres of industrial-zoned land, right along Interstate 95.
It’s there Hourigan is building a
1.2-million-square-foot Lowe’s bulk distribution center. It was initially going to be 560,000 square feet, but early in construction, Lowe’s doubled the order. The project is expected to be finished in September.
“One of the big things that we have seen with a lot of end users and tenants is that readiness is that important,” Marchetti says. “What that really means to a lot of them is how soon can the building be occupiable and begin moving product into it.”
“As these markets evolve and things are happening, the decision windows are shorter and shorter and tighter and tighter,” Hourigan says. “If [a developer] is not fairly well down the path, not only [with] your site development, but your utilities, your zoning and maybe even a spec building, then [companies] will move on to the next site that is further along [with] development. It requires [the developer] to invest upfront, to be able to respond in a time frame that some of these companies are looking for.
“The average time from when a user starts looking for their space and when they want to occupy is six to nine months. They are ready to go,” Hourigan says. “If you have the right site, and you proceed with a product in high demand, you’ve got a pretty good shot you’re going to land something.”
Taylor Chess, president of development for Fairfax-based Peterson Cos., echoes Hourigan and Marchetti.
“COVID has created a lot of chaos, and chaos creates incredible change,” he says. “[COVID] has accelerated so many aspects of business that were going to be happening over the next 10 years, but it’s accelerated that into a really tight timeframe.”
Peterson Cos. started investing in industrial land for data centers, warehouses and distribution centers about eight years ago.
“We were fortunate that we had acquired 275 acres on I-95 in Stafford County to do a major industrial park,” Chess says. Some of that land, in Northern Virginia Gateway, will be used for an Amazon cross-dock fulfillment center that will serve as an East Coast supply chain hub, scheduled to open in the second half of this year.
“We’re lucky we have another 180 acres to develop,” Chess says.
The company has also invested in another 150 acres in Winchester, and Chess says Peterson is looking at “multiple other key logistics sites for additional industrial development.”
Peterson Cos. is running into the same issue as Hourigan with timelines, however.
“When you talk to the end user of … the buildings, they want to talk about buildings [being delivered] tomorrow. They don’t want to talk about building … in two to three years. If you’re two to three years out on a project, they’re not interested in talking,” Chess says.
“Most of the people we talked to want something before the end of 2022. Some people are even looking for mid-2022. If you’re telling them that you can’t have something available for them until 2023 or 2024, they say, ‘I can’t talk about that.’”
Says Poston with Thalhimer: “I think the key thing now, the big driver for people now, is timing. Everybody wants it sooner and sooner.”
But sooner isn’t always possible, especially if there is less land available.
“There’s only but so much land to develop, and quite a few of those projects are about to break ground or launch,” says Williams.
That said, it’s difficult to guess what the landscape will look like in two or three years, he says, “but everything comes in cycles. So, in terms of industrial development in brokerage right now, we’re trying to ride the train while it’s going fast. You never know what’s going to happen around the corner.”