Hampton Roads seeing good activity, but federal defense cuts could stifle some commercial growth

2012 was a good year for the Hampton Roads commercial real estate market,and 2013 is shaping up to be even better with the exception of one dark cloud: the possible effects of sequestration.

Billions in defense cuts which kicked in March 1 after Congress failed to reach a budget agreement has put the defense industry – a big player in Hampton Roads—on hold, Deborah Stearns, a senior vice president with Jones Lang LaSalle, said during a market review on Wednesday.

Sponsored by the Center for Real Estate and Economic Development at Old Dominion University, the 18th annual Hampton Roads Real Estate Market Review and Forecast drew about 500 people to the Ted Constant Convocation Center in Norfolk.

Stearns said the industry already is seeing the uncertainty in the defense sector. “Defense contractors are a cold segment of the market,” she said, noting that some are asking for lease terminations, shorter lease terms leases and consolidations.

On the brighter side, she said the office market in Hampton Roads recovered in 2012 with the average vacancy rate for Class A properties at 12.1 percent. “We recovered what we lost in 2011.” In submarkets with new construction such as Virginia Beach Town Center, where a14-story mixed-use project is going up, the vacancy rate was even lower at 8.5 percent.

The arrival of passenger rail service to downtown Norfolk “is a big deal,” Stearns said. That and the city’s light-rail system are expected to benefit the area and help drop downtown’s office vacancy rate of 16.6 percent. Overall, Stearns expects office vacancy in Hampton Roads to fall to 10 percent this year, which “hopefully will bring new construction, because our office buildings are getting pretty old.”

Industrial
Another speaker, Bill Throne, a first vice president with Cushman & Wakefield |Thalhimer, said increased container volume at the Port of Hampton Roads in 2012 bodes well for the industrial market. That market has seen a vacancy rate of about 12.5 percent the last three years, he told the audience. The expansion of the Panama Canal in 2015 is expected to draw more port traffic to Hampton Roads, which should attract interest from logistics companies. During the first quarter, Throne said he received four inquires from companies seeking anywhere from 300,000 to 2 million square feet of industrial space.

Retail
In the retail sector, grocery stores are becoming a star tenant. Currently, there are four new stores under construction, said David Machupa, a vice president for Cushman & Wakefield Thalhimer.  Among those players are Kroger, who is building one of its larger 120,000-square-foot plus stores in Virginia Beach and Whole Foods, which opened its first store in the market on the Southside. It plans a second location on the peninsula in Newport News. Harris Teeter also is expanding its number of stores in the area.

Overall retail vacancy was 7.8 percent in 2012, down from the 10 percent rate of nearly three years ago.  2012 also saw the opening of a national retailer, Urban Outfitters, in downtown Norfolk in a location outside of MacArthur Mall. “That’s a good sign for the city of Norfolk, “said Machupa. He expects continued retail expansion in 2013 with two caveats: sequestration and gasoline prices. “Consumer spending is affected by spending on gasoline prices.

Multifamily
Multifamily projects, one of the strongest performing sectors in 2012, also are expected to remain strong, said Dwight Dunton III, president of Bonaventure Realty Group LLC.  Several factors are driving that sector, he said, including a drop in home buying among military buyers and millennials—people between the ages of 16 and 29. That generation is waiting longer to get married, and they want the flexibility in lifestyle that an urban apartment near offices and stores can give, he said. Also, many millenials can’t afford to buy a house, noted Dunton, with many of them shouldering large amounts of student debt.

“Students loans have grown 511 percent since 1999 to almost a trillion dollars,” he said.  “While a house has never been more affordable, the ability to put down a payment has never been harder …  So they’re delaying major purchases like cars and houses.”

Many millenials are living with their parents, Dunton added. “If the people moved out, we’d have a million more renters in the market place.  So as the economy recovers, the demand will continue to be very strong. “

According to Dunton, military home ownership has dropped by 8.2 percent nationally, while Virginia has seen a drop of 20 percent. “That will continue as the sequester does what it does,” he said.

Currently in Virginia, he said there are about 5, 500 apartment units under construction.  “People are coming into this business because they’re seeing the opportunity and the demographic drivers,” he said.

Residential
In a counter point to Dunton’s remarks, J. Van Rose, president of Rose and Womble Realty, said every indicator in the residential home market in 2012 in Hampton Roads moved in a positive direction. “”Existing home closings were up by 7.6 percent, new home closings were up by 15.7 percent and building permits saw an increase of 18.5 percent … Today, only having 9,000 houses for sale in a market of 1.7 million people is about right. In terms of balance, it’s not a buyers market, or a sellers market. ”

From 2011 to 2012, foreclosures dropped by 15 percent in Hampton Roads, he said, while short sales increased by 45 percent. “You ought to be clapping about that,” he said.  “If we can get rid of those short sales, the market will finally stabilize …”

According to Womble, the average sales price for a home last year in Hampton Roads was $213,882. “At current interest rates, 70 percent of the households in Hampton Roads can afford a new home,” he said.