byline: Paula C. Squires

2012 data compiled by the Charlottesville office of CBRE show a commercial office market with strong demand and limited vacancy downtown.

“Overall we describe the region as ‘stable’, since modest declines in certain market segments were off-set by modest gains in others. For example, despite an uptick in vacancy in both the North and the East quadrants, rental rates increased in the market on average year-over-year, with downtown experiencing positive net absorption and a continued shortage of available Class A office space,” Cass Kawecki, vice president at CBRE|Charlottesville, said in a statement. 

The market report, presented to the Charlottesville Regional Chamber of Commerce, notes that as of 2012 there was about 1.8 million square feet of Class A commercial space in the Charlottesville region (excluding owner-occupied, condominiums and institutional space), of which 13.8 percent was vacant. That’s below the national average vacancy for Class A office for the same period of 15.4 percent, but it’s higher than the rate of 11.7 percent that Charlottesville experienced in 2011.

Other 2012 economic indicators include:

·      A slight increase in average rental rates, from $22.19 per square feet to $22.30 per square feet.

·      Negative net absorption overall in the market primarily because of increased availability in the U.Va. Research Park on 29 North.

·      Continued unemployment rates below national and state averages.

Richmond’s commercial real estate market is in transition, slowly moving from a tenant’s to a landlord’s market.

Apartment developers are keeping watch on the region’s multi-family supply, which isn’t overbuilt … yet.

Don’t expect to see speculative construction this year. Preleased projects, though, including a 40,000-square-foot office building in Reynolds Crossing in Henrico County, are getting off the ground.

Amazon’s two new massive warehouses and The Vitamin’s Shoppe’s 311,000-square-foot warehouse going up in Ashland are putting Richmond on the map as a player in distribution.

Those were some of the takeaways during a broad overview of the market Tuesday at the second annual Richmond State of the Market event sponsored by Bisnow at the Omni Hotel in Richmond. About 200 people attended the event, which featured two panels of commercial real estate executives discussing trends in the office and multi-family sectors.

As the nation’s economy slowly recovers, the office market is beginning to tighten with few large blocks of space available and fewer quality spaces even in smaller ranges.

At Innsbrook Corporate Center in Henrico, office vacancy — which was nearly 30 percent in 2009 — has dropped back into single digits, said Paul Kreckman, vice president in Richmond for Raleigh, N.C.-based Highwoods Properties Inc., one of the center’s largest property owners. “If you are looking for quality of space, there’s not that much available, which has allowed us to raise some of our rates over the last six months to a year.”

But landlords aren’t getting too pushy. Customer service is key as companies work to retain tenants. “Right now it cost 10 times more to replace a tenant than to keep one,” observed panelist Tony Beck, a vice president for First Potomac Realty Trust.

Tenants realize the market is tightening, and some are asking landlords for early renewals. Charles MacFarlane, a managing member for MacFarlane Partners in Richmond, said his company recently worked with a tenant at the Arboretum Office Park in Chesterfield County whose lease wasn’t up for another year and half. “They wanted to renew, so we dropped their rate, from about $20 per square foot to the high teens. They got something out of it, and we got a renewed tenant,” he said.

When office market moderator Charlie Polk, managing partner for the Richmond office of Jones Lang LaSalle, asked what Richmond needed to do attract more out-of -town companies, the panelists responded with wide-ranging answers. They suggested everything from retaining low-cost airline carriers at Richmond’s airport, to eliminating developer proffers in Chesterfield County and reducing the BPOL (business, professional and occupational license) tax.

MacFarlane noted that Richmond City Council recently approved a measure that exempts business and companies that relocate to Richmond from the BPOL tax for two years.

Kreckman says the region needs to offer a third urban style office component — beyond downtown and suburban campus offices — to attract new corporate tenants. “That’s a piece that we’re trying to put into play with our Innsbrook Next plan,” he said, referring to a future plan of development for the corporate center that includes higher density buildings in a mixed-use, urban, village style environment.

In summing up market prospects for 2013, J. Sargeant Reynolds Jr. said the market is getting steadily getting better — with lots of activity in the medical office and multi-family sectors. Reynolds is a principal with Reynolds Development, the developer behind the 90-acre Reynolds Crossing mixed-use project in western Henrico County that he said is 100 percent leased. “We’re getting ready to add a 40,000-square-foot office building on Broad Street. That preleasing is getting better.”

In Richmond’s multi-family market, Ivan Jecklin, co president and general counsel of Weinstein Properties, says it’s a tale of two markets. “You have the suburban market and what’s happening in one small area of the city of Richmond in the Shockoe Bottom, VCU, Manchester area. “ That’s where many new apartment units have been added in recent years, said Jecklin, as developers took advantage of tax credits for the adaptive reuse of historic buildings.

According to Jecklin, about 1,000 apartment units were added to the area from January to July of 2012. There are 1,600 units under construction, he added, and 4,000 more proposed, primarily in that active submarket he described in and around downtown Richmond.

Richard Souter, a principal with WVS Cos. in Richmond, which built Rocketts Landing —a mixed–use project on the banks of the James River near downtown — said Rocketts plans to start work this summer on a new, 150-unit apartment complex.

In the suburbs, the hotspot for apartment development continues to be the Short Pump corridor of western Henrico County, with development now reaching into Goochland County.

Souter said the downtown market has been underserved for years, and he isn’t worried about an oversupply of apartments at this time.

However, Wink Ewing, an investment sales broker with ARA Mid-Atlantic, a multi-family and land advisory and brokerage service, says his greatest fear about multi-family is oversupply. “We’re not there yet, but we’re pushing the limits. We might there in a year or two,” he said.

Dwight Dunton, founder and president of Bonaventure Realty Group in Arlington, a firm that specializes in multi-family asset management and development, noted that mixed-use projects that create an urban vibe, such as Virginia Beach Town Center, have been successful, but frequently require public subsidies. Developers may prefer infill sites in cities, he added, where infrastructure already is in place, as compared to creating new infrastructure for urban projects in the suburbs.

Going forward, he said one of the Richmond market’s greatest strengths is stability. “When Richmond is good, it’s good. When it’s bad, it’s not terrible. We’ve been here for 12 years. The peaks and valleys aren’t that far apart.”

New commercial development could be coming to skyline cities in 2013 and 2014, including Richmond, as demand for office space picks up against a backdrop of constrained construction.

The observations on supply and demand come from Jones Lang LaSalle’s Spring 2013 United States Skyline Review. “In all but a handful of the skyline markets, large tenants will have few existing options to consider and thus will be forced to look at proposed development options if they desire to explore relocation options,” John Sikaitis, senior vice president of research at Jones Lang LaSalle, said in a statement.

Richmond is one of 34 city centers across the nation in which Jones Lang LaSalle tracks Class A and trophy office properties for its Skyline Markets report. Its researchers track the hottest office micro-segments where tenants and investors alike have focused demand for office space in a flight to quality and efficiency throughout the recent recovery.

“These are the segments of the markets that always lead the rest of the office sector in trends of leasing, rent and ultimately investment growth,” Sikaitis said.

Richmond’s downtown skyline inventory by the numbers:

· 12 Class A or Trophy buildings

· 3,725,958 square feet of office space

· Currently 9 percent vacancy (down from a peak in 2009 of 14.1 percent)

· Average rental rate is $25.54

“Lack of speculative construction and a flight to quality have definitely helped Richmond’s skyline recover,” said Charlie Polk, managing director, Jones Lang LaSalle, in Richmond. “But there are several large firm downsizings and relocations which could cause vacancy rates to markedly increase in 2014.”

A new office tower is scheduled to begin construction in downtown Richmond in June, with Chicago-based Clayco planning a 15-story, $110 million project. The law firm of McGuireWoods has agreed to be the building’s lead tenant, signing a lease for 217,000 of the buildings 261,000 square feet. That’s a smaller footprint than the company currently has at space at the James Center where it leases 244,000 square feet.

According to the report, vacancy rates are in the single digits in 10 skyline markets, including Pittsburgh; Richmond; Bellevue, Wash.; Houston, Portland, Ore.; the New Jersey Hudson Waterfront, Raleigh, N.C.; San Francisco; Philadelphia and Boston. Additions to supply are only beginning to appear, with office construction in eight, or 24.2 percent, of the skyline markets, including speculative construction in three markets.

By mid-2014, all of the skyline markets will have reached equilibrium, where the balance of supply and demand has historically made rents grow and new construction feasible, Jones Lang LaSalle’s researchers predict.