Q&A: JLL’s John Dettleff on DC’s Booming Industrial Market
In a hot market for last mile ecommerce, the DC Metro region is likely to see a huge spike in the coming years
JLL recently released its Better Than Normal: Vision 2021 report that focuses on the future of real estate, and one of the biggest takeaways concerned the industrial market and the fact that the U.S. will need 1 billion square feet of industrial space this decade to keep up with demand.
The D.C. Metro region is expected to be one of the top markets to help in that regard.
“I can characterize the Washington, D.C., industrial market in one word — undersupply,” said John Dettleff, a senior managing director at JLL. “We experienced record absorption in 2020 with 1.3 million square feet and despite the new deliveries, vacancy remains at a historically low 6.4 percent.”
He added that looking forward to 2021, the construction pipeline is a historically low 750,000 square feet and leasing activity is at record high levels, especially in transactions over 50,000 square feet, where the market is most severely undersupplied.
“Demand will grow, supply will grow, and values will grow,” Dettleff said. “Washington, D.C., will ultimately become a more strategic industrial market from a national perspective.”
Dettleff, who is part of a team of five brokers at JLL covering the entire D.C. region, spoke with Commercial Observer about why the industrial market is so strong and what he expects in the years ahead.
Commercial Observer: How does the region compare with the rest of the country? Where does it sit as far as activity?
John Dettleff: At 98.5 million square feet, the Washington, D.C., industrial market ranks 44th in the country. We pale in comparison to the nation’s largest industrial markets of Chicago, Los Angeles, and Central Pennsylvania, whose combined inventory totals nearly 3 billion square feet. These large industrial markets house numerous 1 million-square-foot distribution centers that distribute goods to multiple regions across the U.S. Conversely, Washington, D.C., has received most of its goods from larger neighboring industrial markets, such as Central Pennsylvania and Baltimore.
How has this changed recently?
The Washington, D.C., industrial market is in the midst of a significant change. As e-commerce delivery mandates shrink from 2-3 days to same day/next day, e-commerce companies can no longer distribute their goods to the D.C. region from a neighboring market. They must locate their distribution centers within the region. This paradigm shift is the primary driver of D.C.’s recent industrial demand.
What are the key areas of activity in this region? What are the hot markets?
The recent centroid for most tenants distributing to the D.C. region is either the I-495/I-270 intersection in Maryland or the I-495/I-395/I-95 intersection in Virginia. Of course, there is very little industrial inventory in these locations, so tenants are forced to expand their geography to more established industrial markets, such as Prince George’s and Frederick counties in Maryland or Loudoun and Prince William counties in Northern Virginia. All of these markets are white hot. They have experienced 10 to 12 percent year-over-year rent growth and vacancy rates dropped to historically low levels — under 1 percent in Frederick, Md., for example — despite ample new product delivered in 2020.
What makes this area so strong for the category?
Availability of Class A industrial product is the primary driver of demand in these regions. While tenants would prefer to be in Arlington, Va., or Bethesda, Md., the industrial inventory in these areas is non-existent or functionally obsolete. Therefore, industrial occupiers must compromise proximity with functionality, and those two points meet in the Prince William, Loudoun, Frederick and Prince George’s counties.
However, there are notable exceptions to that rule. Fundrise is redeveloping two functionally obsolete industrial buildings at the I-495/I-395/I-95 intersection into a state-of-the-art, 140,000-square-foot distribution center, which delivers this year. Similarly, Atapco Properties is delivering the largest block of “inside-the-Beltway,” Class A industrial space next year — one mile from [the] District of Columbia on the site of an old printing plant.
What are industrial tenants seeking?
Currently, industrial occupiers are looking for: first, immediate proximity to the population; second, scale (100,000 square feet or more); and third, immediate occupancy. There are very few industrial projects that offer all three of these elements.
What do industrial tenants like about D.C.? What attracts them to the area?
The characteristics of our population — density, growth, education, low median age, affluence — are the primary drivers of demand. Washington, D.C., is an e-commerce retailer’s dream. The market is also in the middle of a population shift to the urban core. This has created a building boom, which has been a boon to the industries that service or supply these construction projects. Consequently, the construction industry has been a large driver of industrial demand in the Washington, D.C., market over the past few years.
How did the pandemic impact the industrial segment both here and overall in the U.S.?
The paradigm shift went into hyperspeed during the pandemic. Within a month after the national lockdown, we saw many new occupiers looking in the market, and the speed and size of their space requirements are staggering. Our colleagues across the U.S. have seen the same trend. It’s a record year in all major industrial markets across the U.S., and it’s a record year for the JLL industrial platform as well.
Any big trends you’re seeing in the category that will shape how industrial moves forward?
There are two major trends. [First,] the development pipeline in Washington, D.C., has swelled to record levels since the pandemic. Consequently, the market supply will grow significantly in late 2022 through 2023. Our team believes increased levels of inventory will create increased levels of activity — no oversupply. Thus, the Washington, D.C., industrial market will become a more significant player in the U.S. industrial market as our industrial supply grows.
Second is flexibility. Supply chains are dynamic, and they need to adapt to shocks like the pandemic, seasonality, population shifts, etc. It’s hard to create flexibility in the rigid environment of commercial real estate. Therefore, using technology to create marketplaces that absorb these shocks (e.g. marketplaces for on-demand, tractor-trailer parking or short-term warehouse space) will become increasingly important. We love big deals, but my team is embracing with equal importance these small, short-term assignments, too.
What do you expect for the future? What can you project about the industrial landscape in the year ahead?
2021 will be the year of undersupply and compromises. Occupiers need to be in D.C. The space they want doesn’t exist. Working with occupiers to solve these problems will offer valuable insights into predicting future industrial demand and supply.
Fundamentally, rents will continue their trajectory of double-digit increases, and land and building values will break the historic levels set in 2020.
How has the market evolved over time? When did it become the big player it is today?
The Washington, D.C., industrial market hit its current trajectory in 2018. I believe there were two reasons for this. First, the shortening of e-commerce delivery mandates to same day/next day, and second, the enforcement of electronic trucking logs (ELDs). The consequence these two forces was that e-commerce distribution centers had to be located within the D.C. region — our market couldn’t be serviced by the neighboring industrial markets of Baltimore and Central and Eastern Pennsylvania. Therefore, as more and more retailers are building out their direct-to-consumer infrastructure, our market will continue to see industrial growth.