Data Center Conversions Continue to Impact Northern Virginia Industrial Market

More than 1.4 million square feet of inventory has been converted to data centers since 2008 in the region. The pace of conversions has averaged 273,725 square feet since 2015, chipping away at nearly 2% of supply each

Source: JLL Mid Atlantic Research

WASHINGTON, DC—The continued appetite for data center use has caused many property owners to convert their industrial buildings to data centers in Northern Virginia, a trend that has fueled higher rents and lower available inventory.

According to a report released by JLL, as data center supply in Northern Virginia has skyrocketed over the past 10 years, existing and future industrial inventory have come under pressure, particularly in Loudoun County’s Dulles North submarket, where owners continue to reposition existing warehouse buildings to accommodate date center users.

Dulles North industrial and flex supply, which totals more than 16 million square feet, is becoming strained, according to Colin Sargis, research analyst, industrial with JLL Mid-Atlantic Research. He noted that more than 1.4 million square feet of inventory has been converted to data centers since 2008 in the region. The pace of conversions has averaged 273,725 square feet since 2015, chipping away at nearly 2% of supply each year.

The data center submarket has traditionally captured the bulk of new development and thus absorption in Northern Virginia as well, he says. From 2000 to 2008, Dulles North development and absorption comprised 42.7% and 29.4% of Northern Virginia’s totals. Since 2008, however, data center conversions have removed nearly 9% of Dulles North’s inventory and thus inhibited the area’s absorption as the annual pace has dropped from 608,914 square feet to 433,751 square feet.

Dallas-based REIT CyrusOne has been a leader in industrial conversions recently in the area. With its acquisitions of 511 Shaw Road and 45897 Maries Road, the firm has converted the two former shell buildings that totaled 283,189 square feet of industrial space alone over the past 12 months.

“Shrinking supply has led to increasingly landlord-favorable market conditions as tenants face dwindling availabilities in Dulles North,” Sargis states in the report. “Over the past five years, direct vacancy has dropped to 5.4%, while asking rental rates have jumped 18% to an average of $9.38-per-square-foot.”

He said the biggest impact from the strong data center demand in the marketplace has been on future industrial development in Northern Virginia.

Since 2015, 627 acres, once marketed for industrial use, have traded to data center users and operators in 17 separate transactions, he notes, which calculates to more than 5.4 million square feet of potential industrial development being removed from the proposed development pipeline.

“With shrinking inventory and increasingly limited access to future development, logistics users will have to increasingly look toward Manassas, or across the Potomac in Southern Prince George’s County, for options ahead,” Sargis states.

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