Virginia: growing office and industrial markets have new institutional investors riding high

Everything is very upbeat right now in Virginia," says Gregory H. Wingfield, president of the Greater Richmond Partnership. Speaking on behalf of the state's commercial real estate markets, he says the state is riding high on momentum gained mostly in its industrial sector, where a great deal is being invested by companies choosing Virginia as their new home. From Richmond to Hampton Roads and throughout the state, commercial space is tightening and new construction is cautiously taking place.

Industrial fueling region

"The office and industrial markets, especially, are tight, tight, tight," Wingfield says of Richmond, wherethere,s not a lot of space left in either the office or industrial markets." Office space is at a premium, he says, adding that not a lot of product has been built in the last few years, so existing product is being absorbed quickly.

"The main engines fueling the future of the Richmond market are the corporations like Motorola who have chosen to build here," says William R. Elliott, president of the central Virginia region for Goodman Segar Hogan Hoffler, Richmond. There has been a tremendous amount of interest in Virginia as a home for high-tech headquarters, Wingfield says.Over the last 18 months, we have seen billions of dollars poured into the community," he says. Several high-tech businesses have flocked to Virginia, boosting the state's economy and generating thousands of jobs. Recent announcements include Motorola's decision to build a $3 billion semiconductor complex that could employ 5,000 people, and Dupont's selection of Richmond for a $60 million plant to make its new Zytel high-strength plastic. Also, a joint venture between Motorola and Siemens AG is investing $1.5 billion in a new semiconductor plant which will employ 1,500.

Additionally, Wingfield says, the number of Fortune 500 companies locating headquarters here is increasing. One such company is Pittston Co., which announced last spring that it would move its headquarters to Virginia Center from Stamford, Conn. "The move increases Greater Richmond,s roster of Fortune 500 headquarters to eight and the number of Fortune 1000 headquarters to 16," Wingfield says.

Other construction is under way to help make room for those interested in coming to Richmond. Occupancy rates are rising as construction continues at downtown Richmond's new $180 million Virginia Biotechnology Research Park. And to aid in the city's infrastructure, $8.8 million has been invested at the Port of Richmond, where wharf capacity and enhanced container and cargo-staging-areas are being expanded to meet tonnage volume projections. Construction also began in 1995 on $24 million in airport improvements at Richmond International Airport.

Indeed the industrial market is tight enough to warrant such investment. According to Jeffrey A. Cooke, vice president of Morton G. Thalhimer Inc., Richmond, overall industrial vacancy at midyear 1996 was 6.17%, while year-to-date absorption totaled 498,000 sq. ft. "The industrial market continues to absorb space, although at a slower rate due to the lack of available inventory," Cooke says. Warehouse/ distribution space truly is at a premium here, as vacancy in that sector is at 1.44%."This continuing tight market is creating pressure on users to find existing buildings," Cooke says. "Landlords will no doubt benefit from this environment and increase rents as leases are renewed."

"The industrial market is as hot as ever," says Gerald Divaris, president of Divaris Real Estate Inc., Virginia Beach.

"It is a strong and hot segment throughout the state with new development everywhere, some speculative construction and interest from investment groups buying properties across the state."

Office vacancies dropping

The suburban office market, too, is tightening, although more quickly than anyone expected. "As the suburban office market strengthens in Richmond, rents may increase more rapidly than previously anticipated," says Frederick W. Plaisted II, vice president of Morton G. Thalhimer. Vacancy in this market is 7.42% while the downtown office market shows more vacancy at 16%. "Construction activity continued at a strong pace during the first half of 1996," Plaisted says. "And it's expected to continue as demand continues to outpace supply."

"Throughout Virginia, office vacancy rates have descended into the single digits, with the exception of some downtowns like Newport News, Richmond and others," says Divaris. He describes the cycle that is trending here: "Two things occur in Virginia's office market, today. Rents increase, new construction begins, and that new construction brings higher rents. That, in turn, spurs renovations of C-grade properties not previously renovated." Speculative construction that is under way in Virginia Beach is more than 60% preleased, Divaris says. "That's symptomatic of what's occurring in this hot market. A lot of investors and developers are focusing on prices now in the $100 per sq. ft. range, which is closer to replacement costs and has not been common in the recent past."

Major announcements for the first half of 1996 included Heilig Meyers, plans to relocate its headquarters to West Creek. In downtown Richmond, financial services firms, continued expansion is leading the way toward positive net absorption of Class-A space. "We see continued positive results for the balance of the year," says Jeffrey S. Bisger, CCIM and executive vice president of Morton C. Thalhimer. Class-A and well-located Class-B properties should see opportunities to increase occupancy levels, he says, while rates for Class-A are firming with fewer concessions being offered. Rents, according to Elliott, are in the $17 to $19 per sq. ft. range for downtown Class-A properties while Class-B gets about $12.50 per sq. ft. Suburban office product is in the $15 to $17 per sq. ft. range for Class-A and $12 to $14 per sq. ft. for Class-B.

Rising rents in Reston, too, are driving the value of suburban office buildings back toward replacement cost. "That was most evident when Carr America purchased approximately 250,000 sq. ft. of building space for approximately $160 per sq. ft.," says Greg Hamm of Mobil Land Development Corp., Reston. Strong demand for office space, combined with the lack of new deliveries, are driving office vacancy rates in Reston below 3.5%, one of the lowest vacancy rates in the country for a major employment center, Hamm says.

Also in Reston, Reston Land Corp. quietly took three of the best remaining office sites in Northern Virginia off the market based upon preliminary agreements to bring three corporate headquarters to Reston from the software, technology and communications business sectors, Hamm says. Formal announcement of these transactions is anticipated in the fourth quarter 1996, with construction to start in 1997. Dallas-based Trammell Crow Co. has announced plans to start the Washington region's first totally speculative office building since the late-1980s real estate crash, Hamm says. The building, to be built in Reston's Commerce Executive Park, will provide 120,000 sq. ft. of office space and is scheduled to deliver in late-1997 or early-1998.

Investment in Virginia office product has a different set of players from the ones it did in the 1980s, Elliott says. "Today's players are institutional, predominantly REITs, that are putting up institutional-grade product at institutional-grade locations. But that will leave the opportunity for local players to fill in niches," he says. There is a steady stream of buyers interested in making investments in the Virginia market, Elliott says. "As more players get into the market, it heats up," he says. "Buyers are looking for a good deal. They're not expecting to make a windfall, but an above-average yield."

Retailers shopping for new sites

The good news for the midyear 1996 retail leasing market in Richmond is lower vacancy rates. "The not-so-good news is the reason for such lower rates," says George C. Stuckey, SIOR, CSM and senior vice president of Morton G. Thalhimer. According to Stuckey, rates are lower because of Azalea Mall's planned demolition and a conversion of an existing retail building on Jefferson Davis Highway to an industrial use.

There also is a continued trend here among most shopping center developers to minimize small shop space in favor of multiple large users to fill their shopping centers. We are seeing a continued fallout among small merchants through acquisitions, consolidations and closures," Stuckey says. " Most shopping center developers today are relying less and less on the small merchant."

Meanwhile, the battle for marketshare among grocery stores and drug chains continues. Food Lion, Winn Dixie, Hannaford Brothers and Ukrop's are all becoming more aggressive in finding sites in order to maintain marketshare. Additionally, Walgreen's, Revco, Rite Aid and CVS are all aggressively looking for sites throughout the metropolitan area, Stuckey says.

"Retail has reached a plateau," says Divaris. "It's really been a hot sector for the last three to four years as new retailers built new stores and took up existing product," he says. In turn, however, there have been some vacancies cropping up in shopping centers previously tenanted by retailers whose popularity is waning. "It's like a little blip on the screen," he says.

Vacancy rates for greater Richmond's retail market were at 7.2% midyear 1996, when 4,279 sq. ft. had been absorbed year-to-date." "We hope to see some pick-up in the vacancy rate."

The future of some malls in Virginia has raised concern in the real estate community, Divaris says. New Market Fair Mall in Hampton Roads is suffering from high vacancies, he says, and both Willow Lawn and Azalea Mall in Richmond are being mothballed. In Norfolk, he says, there is some concern over the effect the new MacArthur Mall going in downtown will have on Military Circle Mall." It will be interesting to see how it all unfolds," he says.

The number of new retailers entering the Virginia market has slowed down the shakeout of overlapping uses, Divaris says. "A large number of grocers are entering the market, but only so many grocery dollars are there for the spending," he says. There are other retail sectors being "overburdened," too, he says. "It could result in a rise in vacancies," Divaris says.

Retailers are expanding their presence in the market number in the teens, says Elliott. He adds that Target has five locations under construction while there also are several Wal-mart and Price Clubs going up, too. "There's just a boatload of activity," Elliot says.

Starting in late-1995 and continuing into the first quarter of 1996, Reston added just under 500,000 sq. ft. of retail space with the opening of the Spectrum retail center, a 340,000 sq. ft. project in the prestigious Reston Town Center District, and the Plaza America retail center, comprised of 150,000 sq. ft., says Hamm.

From an investment sales standpoint, retail is seeing more investment buyers wanting to acquire more of the grocery-anchored centers.With their vanilla criteria, there are opportunities for more flexible buyers who can acquire retail properties with some nuance," Hamm says.

Extended.stay rules hotel growth

In the hospitality sector, the extended-stay hotel is seeing the largest growth margins of any type, Divaris says. With this concept catching on nationwide, it's no wonder more and more have been cropping up in the Commonwealth, he says.

Three hotel chains in particular have been vying to open new locations here. Suburban Lodges, which recently opened in Chesapeake; Studio Plus, with a new location in Richmond and Extended Stay of America has opened in Virginia Beach.

Also, Marriott has come back into the market doing more of its Fairfield hotels and Courtyard Inns in Richmond and elsewhere. "And business hotels are showing increased interest in Virginia, particularly Virginia Beach," Divaris says. "That region is courting the five-star hotels; there's a lot of interest in that category."

"There is a tremendous interest in Virginia among the investment community, with sales taking place in both major and smaller markets," Divaris says. Cap rates are between 9% and 11%, he says, adding that they have come down because of lower vacancies and the strength of the economy. It's no wonder we're riding so high in Virginia," he says.

Lisa Pritchard Mayfield is a contributing editor of Commercial Real Estate South and is based in Macon, Ga.

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