'The Music Stopped' This Year For D.C., Baltimore Industrial Market

Longtime D.C.-area developer Peterson Cos. expanded into the industrial sector five years ago, just before the market's pandemic-era boom. Its timing was impeccable: It struck deals to develop build-to-suit warehouses in Fredericksburg, Virginia, for Amazon and O'Reilly Auto Parts.

“We felt good about it, so we built a spec building,” Peterson President of Development Taylor Chess said at Bisnow's Mid-Atlantic Industrial Summit last month.

The 560K SF spec development delivered in January 2023 at the same Northern Virginia Gateway park as the prior two buildings, but it hasn't found a taker. Chess said Peterson is “still trying to lease it.”

“The market's a little bit soft,” he said. “In the last year, we really felt that softening. ... We're waiting for what we see as the next wave to come. We still have that hangover of that huge push of industrial from Covid to 2023.”

The D.C. and Baltimore metro areas' industrial markets combined to record negative net absorption of 1.2M SF in the second quarter of this year, according to JLL. Baltimore's industrial vacancy rate has risen from around 3% in 2021 to 6.6% last quarter, and D.C.'s vacancy rate has risen from around 4% to 6.2%.

“Since 2017, we have seen almost consecutively positive net absorption in the industrial market,” JLL Executive Managing Director John Dettleff said. “Vacancies [were] at record lows. We've delivered record amounts of industrial buildings. Rents hit record highs. And then at the beginning of 2024, the music stopped.”

Several developers, brokers and contractors at the event, held Sept. 26 at the Renaissance Baltimore Harborplace Hotel, said they have seen demand cool down in the D.C. and Baltimore markets, leading spec projects to sit vacant and new construction to pause.

Chess said Peterson has another 150-acre development site in Winchester, Virginia, but it won't move forward without a signed prelease this time.

MCB Real Estate Vice President Chuck McMahon also said his firm has decided to stop spec industrial development for the time being. His firm delivered a 2M SF spec industrial project in Hagerstown in December, and a spokesperson said it is now 80% leased.

“We saw the market fundamentals begin to slide into early 2024, and we've held back on any spec construction,” McMahon said. “We also partner almost exclusively with institutional capital, and the institutional capital markets are also not favoring spec development at this time.”

ARCO Design/Build Vice President Drew Enstice, whose firm contracts on industrial developments in the region, said he worked on a series of spec projects that were initiated when the market was still booming and are delivering this year in a much quieter market.

“As far as new construction starts, the spec stuff is going way down,” he said. “There's a bunch of things that are kind of out there, and our customers are saying, ‘Yeah, well, if we get a tenant, we'll build it, and if not, maybe we'll build it on spec,’ and then the potential tenant might go away, and they say, ‘Actually, we're just going to wait. We'll just wait until we get the actual tenant.’”

MRP Industrial Senior Vice President Lisa Goodwin, whose firm develops industrial projects across the region, said the D.C. and Baltimore markets have been slower than their neighbors to the north.

“It's been a tale of two cities along the leasing velocity front: in Pennsylvania, New Jersey, it's been relatively active,” she said. “We've done a fair amount of leasing there this year.”

But in Maryland, she said the market is “just too quiet."

“It's just been really quiet in the corridor,” she said. “Rents have risen so much these companies don't have the ability to move. These are smaller tenants in the corridor ... They're renewing, but they're renewing at significantly higher rates, and so you're seeing contractions.”

The high interest rates over the last two years have led industrial tenants to be cautious about deploying capital into relocating facilities, which can cost tens of millions of dollars, Legacy Investing Managing Partner Daniel English said.

“We're seeing a lot of tenants double down in their current space, extend their leases, and I think that's why you're not seeing a lot of absorption,” he said, adding that many tenants are shrinking footprints along with these renewals.

Prologis, a $112B REIT with a massive portfolio of warehouses, has also seen demand cool in its Mid-Atlantic portfolio, Vice President Karen Cherry said.

“We really saw a slowdown of demand this year,” she said. “We've also seen a lot of consolidations, which has led to higher negative absorption numbers than we would like to see.”

But developers say they are still bullish on the market long-term and believe fundamentals will move in a more positive direction next year.

“Going into 2025, we're pretty optimistic that things are going to get slightly better, not significantly better,” Cherry said.

Goodwin said MRP is still “long on the Mid-Atlantic” despite this year's slowdown because it sees strong fundamentals in the region.

“We've got a really good transportation infrastructure along the Mid-Atlantic. We've got four ports that we can access,” she said, adding that rent growth has remained strong and vacancy is lower than other regions. “But most importantly, there's room to grow in this market. Even in the land constrained areas, there's room to grow, and it's just through creativity.”