Richmond stands to be big winner with DC space at a premium.
It should not come as a huge surprise that big companies like Dollar Tree and Lumber Liquidators center their East Coast distribution operations in Virginia. Amazon also has a major fulfillment center there, in the state capital of Richmond.
In the case of Dollar Tree, a Fortune 200 company with over 14,000 retail stores in North America, Chesapeake, Virginia, is where it all began and where it still keeps its corporate headquarters. The distribution center attached to corporate headquarters is referred to as DC1, although, at 400,000 square feet, is one-third the typical size of the company’s newer facilities.
The Hampton Roads port area, and Richmond, 100 miles up the James River, represent excellent geographical locations for distribution operations to the eastern half of the United States. But the region’s potential to become a distribution Mecca has been hampered by unusual economic conditions—high occupancy rates coupled with low rents—which discourage developers to build distribution space on spec. Richmond enjoys a better situation than Norfolk, according to the industrial real estate experts at Colliers International, with more speculative development coming on line and under development, and the situation may be changing in the port area as well.
Size and Location
Beginning in 2016, Dollar Tree invested $110 million to develop its corporate headquarters in the City of Chesapeake, just south of Norfolk and Portsmouth. The project received grants from various state agencies to help it along. Dollar Tree prefers operating larger distribution centers than the 400,000 square feet it has in Chesapeake, according to Mark Valentine, the company’s vice president for East Coast DC operations.
“It’s not representative of what we do elsewhere,” he said. “We’ve grown the number of SKUs we handle tremendously in recent years. This facility has narrow aisles” and can’t accommodate the forklifts used at larger distribution centers. A DC under construction in Ohio will boast 1.2 million square feet, representative of the more modern warehouses the company operates, each of which handle 800 stores.
Dollar Tree sources 40% of its products internationally, much of it from China, and uses the ports of Savannah, New York-New Jersey, Los Angeles-Long Beach, and Seattle-Tacoma, in addition to the local Virginia ports. The company’s site selection considerations “start with transportation modeling, labor availability, highway connectivity, and rail capacity,” said Valentine. “We were one of the early adopters of intermodal.”
According to a recent Colliers report, “The call for an uptick in development has been heard” in the Norfolk area, after little industrial development was seen in 2017 and 2018. The first quarter of this year ended with six properties, totaling almost one-million square feet, under construction, the most since the fourth quarter of 2016.
“This is great news for a market with historically low vacancy and very little new product,” said the report. “The Norfolk market, however, is still in need of more speculative product.”
Norfolk’s vacancy rate for industrial properties in the first quarter was a low 4.0%, 116 basis points lower than the year before. The area’s prospects for economic growth are bullish, with defense spending—which is on the rise—accounting for 40% of local GDP.
Lumber Liquidators Invests
Lumber Liquidators invested over $60 million in recent years in connection with the expansion of its presence in Virginia, including consolidation of its East Coast distribution operations in Henrico County, adjacent to Richmond. The company benefitted from tax credits and grants, including a $2-million performance-based grant from the Virginia Investment Partnership program, an incentive available to existing Virginia companies.
Lumber Liquidators’ one-million square-foot Henrico County warehouse started distribution operations in early 2015. The facility receives around 12,000 TEU per year from 20 countries, and distributes throughout the eastern United States and as far west as the Dakotas and east Texas.
“We took 100 percent of our imports through the Richmond Marine Terminal last year,” said Chuck Weigand, the company’s transportation vice president. “Outbound it was 100 percent by trucks to stores.”
Three-quarters of the company’s ocean traffic comes out of Shanghai, with the remainder from Europe, South America, and elsewhere in Asia. “We use RMT because it is efficient, cheaper, and more environmentally friendly,” said Weigand.
Two years ago, the Port of Virginia negotiated with the City of Richmond for a 40-year lease on RMT, which is located adjacent to I-95 south of downtown, after it previously operated the facility under a series of five-year leases. Last December, the port celebrated the tenth anniversary of the Richmond Express barge service, which moved 31,500 containers in 2018, its best year on record. A growing number of ship lines now issue bills of lading directly to RMT.
The Richmond Marine Terminal is driving demand for warehouse space in the area, according to Colliers. One-million square feet of spec construction was recently completed and Brother International relocated its East Coast distribution operations from New Jersey to 462,000 square feet of that space.
Richmond is faring better than the Norfolk area in that it “has seen a surge of spec development” in the last year, according to Colliers, “with four projects underway totaling nearly 1.2 million square feet.” In 2018, Richmond saw 1.7 million square feet come online, including distribution facilities for Aldi, Pepsi, and FedEx.
Requirement volumes in Richmond climbed 85% in a year to 5.2 million square feet by the end of 2019’s first quarter, according to Colliers. “Richmond continues to attract e-commerce and third-party logistics users seeking to optimize their supply chains and find adequate labor pools at lower costs,” said its report. Richmond’s vacancy rate in the fourth quarter of 2018 was a miniscule 3.3%, marking the eighth straight year of demand outpacing supply.
The Norfolk area has not seen the same level of supply growth, although “developers have begun to respond.” As vacancies fall, the Colliers report concluded, “large-scale speculative projects could get off the ground.”
