Hampton Roads warehouse space is hot property

Even before Green Mountain Coffee Roasters agreed to buy a vacant 330,000-square-foot warehouse for a new plant in Isle of Wight County, demand for industrial real estate in Hampton Roads was on the rise.

So far this year, more than 2.5 million square feet of industrial/warehouse space in the region has been leased or purchased.

The office and retail sectors of commercial real estate still are struggling to recover from the economic downturn, but available industrial space has fallen in the past year as warehouses - new and old - were leased. The vacancy rate for such space fell to 8.4 percent in September from 10.1 percent a year earlier, according to a recent report by the Norfolk office of real estate firm CB Richard Ellis.

That rate probably would make any office landlord in the region jealous. The office sector's vacancy rate hovered at nearly 18 percent in September, according to the report.

Since the report was completed, a number of warehouse deals probably have reduced the industrial vacancy rate even further, including the Green Mountain deal to establish a $180 million coffee roasting and packaging plant.

Besides Green Mountain, other industrial deals this year include:

n Belgian logistics company Katoen Natie NV bought a 662,000-square-foot building at the former Ford Motor Co. assembly plant in Norfolk. The company plans to use the site to distribute plastic pellets produced by petrochemical companies for making just about any plastic product.

n Communications Test Design Inc. leased 72,558 square feet in a warehouse on Indian River Road near the former Ford plant. The West Chester, Pa.-based company plans to spend more than $2 million and hire 50 workers to house and repair cable boxes for Cox Communications.

n Ace Hardware Corp. and the Navy Exchange Service Command both ordered the construction of warehouses larger than 300,000 square feet to suit their needs in Suffolk.

These developments bring jobs and fill vacant space, local commercial real estate experts said. For developers, the longer a new building sits empty, the less they can make it off as they pay interest expenses on loans and property taxes.

But the deals also pose a new challenge for economic development officials and industrial brokers: There are no new large warehouses left.

The building in the Shirley T. Holland Intermodal Park just east of Windsor that Green Mountain bought was the last new large vacant warehouse available.

Much of the remainder of the region's roughly 7 million square feet of vacant industrial space is scattered among older warehouses and former manufacturing sites not ideally suited to modern distribution operations, said Stephanie Sanker, an industrial broker with S.L. Nusbaum Realty Co.

For a company needing to open an operation quickly, waiting for a developer to build a facility after it signs a lease - known as build-to-suit - might not be an option.

"We're back at the same space we were about five or six years ago, where we've got nothing built, and with developers even more reluctant to build on spec," said Bill Throne, an industrial broker with Cushman & Wakefield | Thalhimer. "If you have a tenant coming into the marketplace looking for something high bay, they're out of luck."

High-bay warehouses feature ceilings more than 30-feet high - sometimes much higher - allowing for stacking of merchandise and flexible interior uses.

The absence of available space could lead growing companies to turn away from Hampton Roads to markets that have space already built and sitting vacant, said Worth Remick, an industrial broker with CB Richard Ellis. That could stifle growth in the region, he added.

"It's like a car lot," Remick said. "You want cars on the lot so people can see them and test-drive them."

Developers, many of whom still feel the sting of the financial meltdown, are reluctant to build a large warehouse on a speculative basis. The warehouse purchased by Green Mountain in Isle of Wight had sat vacant since it was constructed five years ago.

"That's a product type we're not in a hurry to start right now," said Craig Cope, a local vice president for commercial developer Liberty Property Trust.

His firm owns two vacant parcels of industrial land in Suffolk. On the smaller one, Liberty might put up smaller, less risky, industrial buildings, Cope said.

"There's good demand for that type of product all of the time," he said. "It tends to be a good product type in almost every market. You can appeal to a broad spectrum of users."

But Liberty will take a different strategy for large warehouses, Cope said. It plans to hold onto the land and find a company to occupy it first.

"That's always a dicey issue, because a lot of users want to lease space they can touch and feel," he said. "Will a prospect wait that long or go somewhere else? That remains to be seen."

Still, two of the largest recent industrial deals both involved leases for warehouses that didn't exist yet.

Ace Hardware Corp. leased nearly 334,000 square feet at a warehouse park in Suffolk. And Navy Exchange Service Command leased 350,000 square feet in the same park.

Both warehouses are under construction and are part of the CenterPoint Intermodal Center, a 920-acre complex where CenterPoint Properties Trust plans to develop 5.8 million square feet of distribution warehouses.

"Maybe what projects like CenterPoint are showing us is that spec isn't really required," Throne said. "These developers now can work quick. Do we need to have a shell building of 800,000 square feet put up to be able to attract a Microsoft or something for a distribution center? Maybe not."

Josh Brown, (757) 446-2318, josh.brown@pilotonline.com