Space race

Leaders of a regional engineering firm figured finding office space in the Town Center of Virginia Beach would be a breeze. Newspapers were reporting that demand for offices was down nationally.

But that isn’t the case in the Hampton Roads area, where the office vacancy rate was 8.1% for the first quarter of 2023, according to a report by Cushman & Wakefield | Thalhimer. That’s about half the national average of 16.1%, and in some markets, the vacancy rate has hovered around 30%.

“It’s not that there’s not available inventory, it’s that what they want has already been snapped up because everyone wants the same kind of space,” says Rob Wright, a senior vice president at Cushman & Wakefield | Thalhimer in Virginia Beach who’s helping the firm — whose name he’s keeping private — find a location.

The pandemic upended employees’ expectations of working 9 to 5 in an office, and executives have found they need to provide the right incentives and environment so their staff sees a reason to come to the office, he says. They want them to be collaborative, see the benefits of teamwork and then be able to walk someplace nearby for lunch or an afterwork drink.

“Dollar Tree did that at the Summit Pointe project when they merged with Dollar General,” says Wright. “Their CEO basically said, ‘If we’re going to stay in Chesapeake, Virginia, we’re going to build a city within a city. We’re going to build perks for our employees. We’ve got to have space for them to have multifamily apartments right there on our campus. We want to have the best restaurants on our campus, the best entertainment venues and breweries.”

That decision has paid off — Summit Pointe’s two high-rise office buildings, one of which is Dollar Tree’s headquarters, are filled, and tenants are paying some of the highest rents in the Hampton Roads area, Wright says. A third office building is planned.

Guesswork on leasing

Reflecting nationwide patterns, Class A office space in newer commercial developments like Town Center in Virginia Beach and City Center at Oyster Point in Newport News is in high demand across Hampton Roads. But older buildings with Class B or C office space? Not so much. Besides retail and restaurants, office workers also want free, easy-to-find parking, Wright notes.

“I think what we’re seeing in this modified, nontraditional, not-9-to-5 world is that when people have to pay for parking, there is less motivation to go into the office,” Wright says. “There’s just some sticking point of not wanting to go and formally pay for parking versus when you have free parking. Maybe you feel better about popping in for a short workday.”

Downtown Norfolk, along with Hampton, are the softest submarkets in the Hampton Roads area. Besides parking challenges, a major factor is “large blocks of functionally obsolete build-outs” that are unappealing, according to Cushman & Wakefield | Thalhimer’s report.

Wright says it’s difficult right now for executives who have to make long-term decisions about leasing office space without a crystal ball to predict what their needs may be a decade from now.

“I don’t think we’re seeing dramatic reductions in overall square footage requirements,” he says. “What I have noticed is national companies with offices around the country have changed their requirements more than regional and local companies have.”

Some national companies have left the area, while others, such as Norfolk-based Sentara Health, have expanded, Wright says. “Whenever we’ve had these bigger blocks of square footage come up, there has been backfill occupiers grabbing them up, so that’s a good sign for the overall market.”

Port-driven industrial

As for the industrial market in Hampton Roads, it’s remained healthy thanks to the Port of Virginia, an economic driver for the entire state. Amid heavy demand for imports during the pandemic and delays at other U.S. ports over the past two years, many retailers located logistics presences in Norfolk and surrounding localities, says Geoff Poston, senior vice president of Cushman & Wakefield | Thalhimer’s industrial group.

For the first quarter of 2023, industrial real estate had a 2% vacancy rate. “When all the ports across the country were backed up, we were the most efficient port,” Poston says. “Retailers were like, we can’t get into L.A. or Long Beach, we can’t get into New York. Let’s go to Norfolk. They don’t have any issues.”

In 2022, the Port of Virginia processed more than 3.7 million 20-foot equivalent units (TEUs) at its terminals, setting a record. Cargo movement and handling has resulted in higher demand for industrial space near the port’s terminals from distributors and third-party logistics companies.

Amazon.com, for example, built a 3.8 million-square-foot robotic fulfillment center in Suffolk and a 650,000-square-foot processing center in Chesapeake. In June, two industrial warehouses in Chesapeake sold for $24 million, and they’re fully leased to tenants that include Fortune 500 government contractor CACI International and third-party logistics firm Kalman & Co. Since July 2020, 79 companies have announced plans to establish manufacturing and distribution presences in Virginia, investing nearly $4 billion, according to an April 2023 study conducted by William & Mary.

TradePort Logistics, for example, fully leased and moved into Northbridge’s new 334,800-square-foot Chesapeake Logistics Center in May, says Lang Williams, a
Norfolk-based senior vice president with Colliers. TradePort has plans to construct a purpose-built transload facility near the Port of Virginia in the coming months.

Two other projects expected to open in Suffolk in the third quarter of this year are Lowe’s 1.5 million-square-foot regional distribution center in the Virginia Port Logistics Park and the 227,000-square-foot distribution facility that Los Angeles-based Industrial Realty Group (IRG), one of the largest real estate developers in the nation, is building on 40 acres in Suffolk. It will be fully leased to RoadOne IntermodaLogistics, a national intermodal, warehouse and logistics services company.

IRG is also working on two build-to-suit facilities in Suffolk and Portsmouth, totaling 1 million square feet, for Unis, a third-party fulfillment and transportation company.

Companies are willing to locate near the port — and even a bit further away from the terminals — because it’s a fairly sure bet, given the port’s investment of about $1.4 billion to expand its overall capacity and cargo handling capabilities. This includes dredging the harbor to 55 feet so it can accommodate two ships at a time, “which is a game changer,” Poston says.

Demand is so high, Williams adds, that developers are starting to look to places along Interstate 64 like New Kent County, where AutoZone has broken ground for an 800,000-square-foot facility, and James City County, where Green Mount Logistics Center is expected to have a 373,536-square-foot Class A spec distribution facility ready in the fourth quarter of this year.

“So, we’re excited,” Williams says, “because we’re going to have more options for these companies to lease, which will be good.”