Say Goodbye to Close-in Flex/industrial Space

VIENNA, VA—Flex/industrial space within the Beltway is becoming an endangered species as redevelopment opportunities for these buildings beckon owners, according to JLL.

The supply of flex industrial space inside the Beltway has fallen by 3.1% since its peak in 2008, pushing rents for this product type to their highest point ever, JLL reports. At the end of the first quarter, the vacancy rate for industrial space inside the Virginia beltway was 8.3%. The direct asking rent for triple-net leases had risen above $9.35 per square foot.

In particular, properties located within walking distance of a metro stop are hot commodities and very likely to be snapped up by developers to be turned into office or multifamily or retail use. Right now one-quarter of the nearly 64.5 million square feet of flex industrial space inside the DC beltway is within one-half-mile of a Metro station, JLL says.

These Metro-friendly properties all have a bulls eye on them says John Dettleff, SVP in JLL's Vienna, Va., office.

"There is no industrial space in these markets – especially places like Tysons Corner – that have a higher and better use than multifamily and mixed use," he tells GlobeSt.com. "When you can build ten stories of apartments there is no way an industrial rent will be able to meet that."

There are multiple examples of this trend.

One is JBG Cos.'s proposed Cameron Park in Alexandria, Va., an 800,000-square foot mixed-use project that is replacing an array of industrial buildings near the Van Dorn metro station, he says. Another is the Alexandria-based Oakville Triangle, which is owned by Blackstone's former industrial unit IndCor Properties. IndCor has since been sold to the Singaporean sovereign wealth fund GIC. Located near Potomac Yards, it too will probably replace industrial assets, Dettleff says. (The final verdict is not completely in however: The Oakville Triangle and Route 1 Corridor Advisory Group is expected to complete its review of the study area and make recommendations by June 2015. After that, the Planning Commission and City Council will consider the project for approval in fall 2015.)

Nonetheless the writing is on the wall. "Industrial tenants in that area are all in short-term leases," he says.

Tenants in these properties and similar situations will be forced into a market with far fewer -- and more expensive -- options, Dettleff adds. As the trend gains momentum, it " creates a compounding effect on vacancy and rents," he says.

These tenants may be able to hopscotch for a while in nearby buildings, but over the long term they will be forced to migrate west, moving to the Dulles and Manassas industrial markets, according to Dettleff.

Consumers will also be affected by the shift, Dettleff says.

"Finding a construction supplier in the District or getting your car fixed in Tysons Corner will become a thing of the past."

"It will really impact where we procure our services."